BBVA OpenMind Book The Search For Europe Contrasting Approaches 1 PDF

THE SEARCH
FOR EUROPE
Contrasting Approaches
THE SEARCH
FOR EUROPE
Contrasting Approaches
TRANSVE RSALI TY AND TER R ITORY
SUMMARY
THE ECONOMIC FOUNDATIONS EUROPE AND ITS NATIONS:
OF THE EUROPEAN PROJECT POLITICS, SOCIETY
AND CULTURE
20 Francisco 100 Indermit 202 Christopher 288 Robin

González Gill, Martin Bickerton Shields
Europe, between Raiser and From Nation- From the “Ima-
Stagnation and Naotaka States to Member gined” to the
Technological Sugawara States: European “Post-bureaucra-
Revolution: Digi- Europe’s Growth Integration as tic” Region: The
tal Banking as a Model in Crisis State Transfor- Search for Europe
Driver of Econo- mation in Higher Educa-
mic Growth 128 Colin tion Policy
Crouch 216 Vivien Ann
46 Peter A. Hall European Em- Schmidt 302 Bichara
The Euro Crisis ployment and The Impact of Khader
and the Future Labour Market European Integra- Muslims in
of European Policy tion on National Europe: The
Integration Democracies: Construction of a
150 Bart Democracy at “Problem”
68 Alberto Van Ark Increasing Risk
Alesina Contrasts in Eu- in the Eurozone 326 Julia
Rules, Coopera- rope’s Investment Crisis Kristeva
tion and Trust in and Productivity Homo Europaeus:
the Euro Area Performance 238 Nieves Pé- Does a European
rez-Solórzano Culture Exist?
80 Barry 168 Philip Borragán
Eichengreen Cooke Civil Society and
The European Transversality EU Enlargement
Central Bank: and Territory: On
From Problem the Future Dyna- 268 Kees Van
to Solution mics of Regional Kersbergen
Knowledge, The Welfare
Innovation & State in Europe
Growth
4
T H E ECO NO M I C FO UNDATI O NS OF THE EU R OPEA N PR OJECT
THE UNRESOLVED LIMITS OF BIBLIOGRAPHY

EUROPE AND THE NEW
GLOBAL POWERS
342 John Peet 402 Thomas

The UK and Christiansen
Europe The Strength
of Distant Ties:
356 Daron Europe’s Rela-
Acemoglu and tions with Asia
Murat Üçer in a Changing
The Ups and World
Downs of Tur-
kish Growth, 422 Javier
2002–2015: Politi- Solana
cal Dynamics, the European Foreign
European Union, Policy and Its
and the Institutio- Challenges in the
nal Slide Current Context
386 Orlando
Figes
Russia and
Europe
5
PROLOGUE
This book, The Search for Europe, is the eighth instalment in the annual
series published by BBVA as part of its OpenMind project, an initiative
dedicated to the dissemination of knowledge on the key issues of our time.
Continuing our now consolidated editorial policy, we turned to leading
experts around the world with different perspectives on the European
question and asked them to provide a simple, straightforward exposi-
tion of their ideas that any layperson could understand. Once again, this
year we were able to enlist the participation of twenty-three immense-
ly prestigious authors, influencers of global opinion in their respective
fields, proudly adding their names to the list of more than 150 individuals
who have already written essays for our books. In short, our project is
predicated on the originality, quality, and popular appeal of our authors’
contributions, and I would therefore like to thank each and every one of
them for generously agreeing to join our ambitious mission of spreading
knowledge and contrasting ideas.
This project was launched in 2008, and since then it has experienced
what can only be described as an extraordinary growth. Our books re-
ceived a tremendous boost in terms of visibility and impact after 2011, when
we created our online community OpenMind (www.bbvaopenmind.com),
designed as a space for sharing knowledge.
In addition to all of the books we publish, OpenMind contains articles,
interviews, videos, and infographs, all available in Spanish and English. In
our constant quest to find fresh material and reach an increasingly wider
audience, we have partnered with academic institutions and specialized
publications of the highest calibre—such as the MIT Tech Review and the
Harvard Business Review—as well as with leading online publications de-
voted to popularizing science and technology. By the end of 2015, some 1.3
million users will have read, commented on, debated, or downloaded our
fully accessible contents free of charge.
The fundamental idea behind this project is a desire to help people under-
stand the forces that are shaping our world and influencing—sometimes
P RO LO GUE
quite obviously, and at other times in a much more subtle yet equally pow-
erful way—our daily lives and future prospects. We firmly believe that the
improvement of this understanding is important because it will allow us
all to make better decisions, thereby expanding the horizons of our own
lives and those of generations to come.
The last two books in the series were dedicated to analysing the impact
of the technological revolution we are going through: the first focused on
how it affects our daily lives, and the second examined its repercussions
for companies and the way we work.
This year we have changed tack to offer an analysis of the present and
future of Europe and its integration project.
This process has profound implications for our lives, affecting not just
Europeans but every citizen of the world, because Europe, as a whole, is
still the world’s first economic and trade power—and, perhaps more impor-
tantly, because it is the most ambitious economic and political integration
project ever attempted in the history of humanity, setting an example for
similar processes in other regions.
THE FUNDAMENTAL IDEA THAT FUELS

THIS PROJECT IS A DESIRE TO HELP PEOPLE
UNDERSTAND THE FORCES THAT ARE
SHAPING OUR WORLD
Since the first steps were taken in the 1950s, the process has experienced
five decades of success. Proof of this success is the expansion from six
original founding members to the current total of twenty-eight—with over
a dozen more seeking to join—and the European Union’s evolution from a
free trade zone to a full monetary union by the late 1990s.
For five decades, European integration has been a driving force of eco-
nomic growth in the region and has clearly helped to strengthen the insti-
tutions of the countries that have joined the process along the way, many of
which were newly-fledged democracies still struggling to find their footing.
This astonishing growth spurt has had its share of problems and dispar-
ities. However, the key to this success is undoubtedly the fact that, when
faced with any major crisis, the European Union has always stepped up to
the plate, tackling difficulties by strengthening the ties between its members.
At this time, the European integration process is facing the impact of the
economic and financial crisis that began eight years ago now. The crisis
has had a very negative effect on growth throughout the area, though some
P RO LOGU E
member states have been hit harder than others, and it has highlighted
the flaws and weaknesses in the present stage of the European integration
process, principal among them the fact that a monetary union was created
without a banking union or appropriate mechanisms to ensure the com-
patibility of the member states’ respective economic policies. In addition,
the monetary union has divided the EU into countries with a common
currency and countries outside the Eurozone, further complicating the
already difficult task of the European Union’s governance. Yet undoubtedly
the area’s most serious shortcoming is the relatively low level of political
integration compared to the strides made on the economic front. This has
created an imbalance between the democratic processes for electing na-
tional leaders, whose powers and scope of action are increasingly limited,
and the much more distant—at least from the citizens’ perspective—de-
cision-making processes at the European level. These decisions, whose
impact on the lives of ordinary citizens is growing day by day, are made
in the course of relatively opaque negotiations among a large number of
national governments and handled by a technocracy that does not have
the direct support of the electorate.
As has occurred in the past, the latest crisis acted as a powerful catalyst
for further European integration, particularly with regard to achieving a
banking union and coordinating national economic policies. However, these
steps are being taken in a context marked by the conflicting interests of
countries that want to take the process to the next level and those reluc-
tant or unwilling to yield greater sovereignty to supranational institutions.
Meanwhile, social tensions and nationalistic attitudes are on the rise in
different member states, and until the Union solves its current internal
problems, it has little chance of overcoming the increasing difficulties of
attending to other countries that aspire to EU or Eurozone membership.
Finally, the EU now finds itself involved in an escalation of geopolitical
tensions in neighbouring regions: the biggest concern is Russia, which is
highly suspicious of the EU’s influence on former Soviet countries; but we
must also keep a close eye on the Middle East and North Africa, where
wars and political instability are creating intense migratory pressure and
a rising tide of refugees. All of this has exposed yet another shortcoming
of the European Union: the lack of a truly common foreign policy.
These are the central themes addressed in this book, which is divided
into three sections:
In the first, “The Economic Foundations of the European Project”, the au-
thors review Europe’s current economic situation and outlook and propose
P RO LO GUE
different alternatives in the area of economic policy and institutional re-

form for getting Europe back on the track of sustained growth and job
creation, essential ingredients for the project’s economic, political, and
social success.
The second section, “Europe and Its Nations: Politics, Society and Cul-
ture”, examines the problems inherent in the political coordination of the
European supranational project with current national realities, and dis-
cusses what can be done to help citizens identify more with that project.
The perception of Europe as a truly democratic space where citizens can
make themselves heard, the future of social welfare policies, and the con-
struction of a framework based on shared “European” values where people
of different cultures can live side by side in harmony are just some of the
topics addressed in this part of the book.
Finally, the third section, entitled “The Unresolved Limits of Europe and
the New Global Powers”, broaches questions related to Europe’s external
borders and geopolitics: which countries will or will not become members
in the future, and what are the principal challenges that European foreign
policy faces, not only with regard to its closest neighbours but also to
where Europe fits in the new global order now taking shape, as the eco-
nomic and political power of emerging areas continues to grow.
Europe is such a broad and complex subject that, despite the length of
this book and the wide variety of perspectives reflected in the essays it con-
tains, there are clearly many relevant topics and valuable opinions which
have not found their way into its pages. This is unavoidable, but it is not our
intention to be exhaustive; we have merely aimed to convey the ideas and
proposals of some of today’s finest thinkers and analysts, which we hope
will encourage others to study the issues in greater depth and compare and
contrast these ideas with other viewpoints. In short, our goal—in keeping
with the OpenMind motto, “Sharing knowledge for a better future”—is to
spark a debate, which we will continue to fuel on our OpenMind website,
in order to help our readers learn about and understand the key aspects
of our reality as European and/or global citizens and enable them to make
wiser decisions. It is my sincere hope and desire that our readers and users
will learn from and enjoy this book as much as we have in the process of
compiling and publishing it.
Francisco González
BBVA Chairman & CEO
12
THE ECONOMIC
FOUNDATIONS OF THE
EUROPEAN PROJECT
14
15
T H E E CO NO M I C FO UNDATI O NS O F TH E EU R OPEA N PR OJECT
16
17
T H E E CO NO M I C FO UNDATI O NS O F TH E EU R OPEA N PR OJECT
18
19
E U R O P E , B E T WE EN STAGNATI O N AND TE CHN OLOGICA L R EVOLU TION
FRANCISCO GONZÁLEZ, Chair- This article reviews the specific factors that are
man & CEO of BBVA, graduated hindering growth in Europe. It concludes that a
from the UCM in Economics and
Business Science. Prior to the more efficient banking system is a structural re-
merger between Banco Bilbao  form that would facilitate better resource alloca-
Vizcaya and Argentaria,
he was chairman of Argentaria, tion, reduce the cost of capital, and improve the
where he spearheaded the integra- transmission of monetary policy. Only through
tion, transformation, and privat-
ization of a group of state-owned technological advances can productivity in bank-
banks. He sits on the board of ing be improved. As an example, the article illus-
directors of the Institute for Inter-
national Finance and the TransAt- trates the process towards the digital banking of
lantic Business Dialogue. He is a tomorrow, based on BBVA’s own experience, and
member of the European Financial
Services Round Table, the Institut underscores the need for sweeping changes in
International d'Études Bancaires, the industry’s regulatory framework to guarantee
and the International Advisory
Committee of the Federal Reserve
its stability and protect consumers while also
of New York, and he is Vice-Chair- capitalizing on the vast potential of technology.
man of The Conference Board.
20
EUROPE, BETWEEN STAGNATION

AND TECHNOLOGICAL REVOLUTION:
DIGITAL BANKING AS A DRIVER
OF ECONOMIC GROWTH
Today, European banking institutions face tremendous uncertainty in

the medium and long term, a situation that challenges the very founda-
tions of their current business model.
The sources of that uncertainty are several and diverse, but in all of
them we find, in addition to specifically European elements, factors
which, though often the most important, have a global scope that makes
them much more difficult to control.
The first is a puzzling macroeconomic scenario, characterized by very
modest growth (at least compared to other post-crisis recovery periods),
very low—and, in many countries, negative—inflation, and interest rates
close to zero (negative rates, in real terms). Diverse explanations have
been given for this situation, each with very different implications for the
future of the European economy and, by extension, of the financial system.
THE RADICAL TRANSFORMATION OF THE BANKING

INDUSTRY AND THE SOCIAL CHANGES IT ENTAILS WILL
ULTIMATELY BE TRIGGERED BY TECHNOLOGICAL PROGRESS
The second factor of uncertainty is the drastic and as yet unfinished

overhaul of the regulatory framework of banks. The new regulations are
and will be much stricter, with higher capital and liquidity requirements
and more rigorous measures to ensure transparency and consumer pro-
tection. This process of tightening regulations is a worldwide phenome-
non, but in Europe it will have particularities linked to the development
of a European banking union.
Technological change is the third source of uncertainty and undoubt-
edly the most important in the long term, given its formidable potential
to disrupt financial institutions across the globe. However, its effects
should be felt earlier and stronger in developed societies such as Europe,
which are technologically more advanced and where consumer demands
and habits are changing more rapidly.
21
In the following pages, I will briefly review these major factors that
are spurring the banking system to make a drastic change. I will also
defend my conviction that the radical transformation of the industry will
ultimately be triggered by technological progress and the social chang-
es it entails. Next, I will draw on BBVA’s experience to briefly illustrate
the nature of the change that financial institutions must make in order
to survive and prosper in the new banking industry that is now taking
shape. The article concludes with a commentary on the need for a par-
allel transformation of the industry’s regulatory framework, creating a
regime that guarantees financial and macroeconomic stability and ade-
quate protection for consumers while also making the most of technolo-
gy’s tremendous potential to build a much more efficient and productive
banking system, one that will improve the wellbeing of ordinary people
and stimulate productivity and growth in the medium and long term.
The Global Economy in Uncharted Territory
Global economic trends in recent years, especially those of developed

countries and, within that group, of Europe, have raised a number of
increasingly complicated questions.
The financial crisis initiated eight years of ultra-expansionary monetary
policies, led by the United States and later adopted by Europe and Japan.
For eight years now, real short-term interest rates have hovered close to
zero and even dipped into negative numbers. Despite these policies, eco-
nomic recovery in the wake of the recession is weak, especially in Europe.
The most striking fact is that the extraordinary global monetary ex-
pansion of the last several years has not produced noticeable inflationary
tensions. Quite the contrary: in developed countries and at the global lev-
el, inflation is now lower than it has been for decades. Meanwhile, long-
term interest rates show no sign of incipient inflationary pressure; even
after government debt levels have soared, they remain surprisingly low.
All of this has sparked a heated debate among economists as to the
reasons for this unusual pattern. The implications of the debate are
very relevant, because the underlying causes of the phenomenon will
determine its potential consequences, some of which bode ill for the
future of the global economy. And, of course, the most suitable policies
for recovering growth and avoiding new crises would differ depending
on what caused the current situation.
22
In this controversy, one end of the spectrum of opinion could be rep-

resented by the ideas of Ben Bernanke, former Chairman of the United
States Federal Reserve, who tends to take a relatively benign view of the
current trends, and the other by those of Larry Summers, Secretary of
the Treasury in the Clinton administration and Director of the National
Economic Council during President Obama’s first term, who in late 2013
put forward the much more worrying hypothesis of “secular stagnation”,1
reviving a term coined by Alvin Hansen in the 1930s and making waves
in the economic community.
According to Bernanke, we are essentially in the midst of what we
might call a “savings glut”—too much saving and not enough invest-
ment—that is depressing interest rates. He argues that this excess sav-
ing is largely a result of economic policy decisions made in the past: after
the crisis of the late 1990s, the Asian countries—especially China—chose
to limit the expansion of domestic demand in order to build up their
reserve holdings of financial instruments issued by the most developed
countries, thereby driving interest rates down.
When the 2007-2008 crisis reared its head, the sudden drop in demand
and the consequent relaxation of monetary policies only intensified this
downward trend.
According to Bernanke and others who defend this position, we still
have a significant savings glut because the emerging economies of Asia
and oil producers have only moderately reduced their current account
surpluses, and the major correction experienced in other raw materi-
al-producing countries, like Russia and Latin American nations, has been
offset by an improvement in the current accounts of European countries,
primarily Germany and the so-called periphery (in the case of the latter,
an obvious effect of the crisis and the policies adopted to mitigate it).
In this scenario, policies of low rates and quantitative easing would be
the appropriate tools for stimulating global economic recovery and, to
a certain extent, correcting imbalances in global flows.
This is undoubtedly a highly simplified summary of the “savings glut
hypothesis”, but it is nevertheless useful for contrasting it with Sum-
mers’s alternative theory of “secular stagnation”.
Secular stagnation defines a situation where there is a chronic defi-
cit of investment with respect to savings, leading to less growth in the
1 F
or a general overview of this controversy, see Bernanke’s blog (http://www.brookings.
edu/blogs/ben-bernanke).
23
medium and long term. In other words, the root of the problem is not
excess saving—due to policies adopted in the past—but the existence of
structural factors that depress investment demand. These factors are
usually manifested in two areas: firstly, an ageing and/or declining pop-
ulation; and secondly, a drop in the productivity of new investments due
to an exhaustion of technological change—or, perhaps more alarmingly,
because new technologies require somewhat less capital investment
than their predecessors.
If this were true, we would be facing a future of low growth, possibly
exacerbated by deflation and chronically high unemployment. In this
scenario, interest rates might remain low for quite some time without
ever having a truly stimulating effect on the economy, while causing
major distortions in the distribution of income and asset allocation and
creating a high risk of recurrent asset bubbles.
SECULAR STAGNATION DEFINES A SITUATION

WHERE THERE IS A CHRONIC DEFICIT OF INVESTMENT
WITH RESPECT TO SAVINGS, LEADING TO LESS
GROWTH IN THE MEDIUM AND LONG TERM
Of course, these two alternatives are not mutually exclusive: the reality
could be a combination of both. But the critical question is this: are we
essentially in the final stages of a “savings glut” or in the early stages of
a secular stagnation process?
No one can deny that there is evidence of a savings surfeit. However,
even if this were the fundamental cause of the current situation, it is
not at all clear that the problem can be solved quickly or solely by re-
sorting to demand-stimulating policies. I say this for two reasons: firstly,
because changing the policies of the countries that are generating this
current account surplus will not be easy, as China’s recent difficulties
clearly prove; and secondly, because excess saving also has long-term
causes related to demographic factors.
Over the past decade, in addition to a very steep rise in the current
account balance of emerging economies, we have also witnessed a
rapid increase of pension funds accumulated by “baby boomers”, the
largest and most prosperous generation in the history of the world’s
developed countries.
This has triggered a staggering rise in the demand for premium fi-
nancial assets, fixed-income instruments issued in the most advanced
24
nations, which has helped to keep interest rates low. The “baby boomers”
are now nearing retirement age, and in fact many of them are already
pensioners, but it will be another decade before the process is concluded.
On the other hand, categorically diagnosing our global problems as a
case of “secular stagnation” would be very risky. At this point we do not
have sufficient data, and the data we do have is far from conclusive. Yet the
global economy does seem exposed to that risk, which must be assessed in
terms of two factors. The first is demography, and the second is technology.
With regard to the demographic factor, the global population growth
rate has been steadily declining, from the highest recorded rate of 2.2%
per annum in the early 1960s to around 1% per annum today. By 2050, it
will be less than 0.5%. Meanwhile, the world’s population is growing older,
and not just in developed countries. By circa 2050, one-third of China’s
population will be over the age of sixty (compared to 12% at present).
And Europe’s demographic outlook is much worse than that of other
regions, with the exception of Japan.
Naturally, as the population shrinks and/or moves into retirement, eco-
nomic growth tends to slow down and can even become negative unless
productivity rises to offset the diminishing workforce.
Therefore, the real issue is: what will happen to productivity? And in
economics there is probably no question harder to answer than this.
In order to address this issue, it may be helpful to turn the clock back
to the late 1930s, when Alvin Hansen first coined the term “secular stag-
nation” (Hansen 1938). Hansen observed that the expansionary policies
of Roosevelt’s New Deal were only having a modest effect on economic
growth in the United States, and that recovery from the Great Depres-
sion was proving to be slower and weaker than after past recessions. He
concluded that this was due to a slowing of both population growth and
technological progress, and that it would lead to a prolonged period of
low growth for the US economy.
Of course, Hansen could not have foreseen the impact of World War
II and the economic boom that followed, thanks to the accelerated pace
of technological development and the surge in population growth (the
“baby boom”).
Today, the question is whether or not developed nations will be able
to capitalize on the demographic momentum that emerging countries
are expected to maintain for at least another generation, and, above all,
how the technological change currently underway will affect investment
and productivity.
25
The Impact of Technological Change on Growth
When attempting to assess the impact of technology, our greatest diffi-

culty probably lies in the nature of today’s technological progress, which
differs in many ways from what we have experienced in the past.
It seems clear that we are in the midst of a period of rapidly acceler-
ating scientific and technological change, which might aptly be called a
revolution. Every revolution in the history of humanity, from the Neolithic
Revolution of agriculture and the first settlements to the Industrial Revo-
lution that began in the late 18th century, has created a dramatic increase
in the need for capital to develop the infrastructures and tools of new
production systems and a very clear and significant rise in productivity.
In contrast, the data we have regarding the current technological rev-
olution’s impact on productivity show absolutely no recent improvement
in total factor productivity. In fact, different sources—for example, Rob-
ert Gordon’s (2012) statistics on total factor productivity in the United
States, the world leader of the tech revolution—show that since the
1970s total factor productivity has risen at fairly steady rates (between
0.5 and 1% per annum), which contrasts sharply with the period between
1920 and 1970 when the annual growth rate was consistently above 1.5%.
If this were the case, the prospects for future growth (with or without
secular stagnation, a theory that Gordon also rejects) would be quite
disheartening.
However, there are several arguments that seem to refute this con-
clusion. The first is that this technological revolution is more about the
provision of services than about goods; theoretically, more and better
services are being produced and offered to customers. And, as Joel
Mokyr (2014) points out, conventional tools of statistical measurement
are designed for a “steel-and-wheat economy”, not one in which infor-
mation and data constitute the key inputs and outputs in many sectors.
Many of the new goods and services are expensive to design, but once
they work they can be mass-reproduced and copied in almost infinite
quantities at very low or zero cost. Consequently, they have a huge im-
pact on consumer welfare but contribute very little to product output,
as we measure it. Moreover, many of these services are provided free
of charge via the internet in exchange for benefits such as advertising,
customer recruitment, or information that are very difficult to quantify.
A growing percentage of investments are also being made in intangible
assets, especially software.
26
InMoov animatronic android robot, made from 3-D printed parts.
All of this leads to widely acknowledged problems with the measure-

ment (undervaluation) of GDP, investment, and productivity which, if
corrected, would probably paint a very different picture of future growth.
Finally, as Mokyr observes, technological revolutions develop and bear
fruit over a very long period of time and often in unexpected ways. Today
we have increasingly powerful technology (tools and instruments) for
scientific progress, which in turn will eventually lead to new technolog-
ical breakthroughs. The technological revolution is just beginning.
Even limiting ourselves to what we know today, we can come up with
an infinite list of ways to spur investment and future growth: new ma-
terials, multiple advances in life sciences, artificial life, the Internet of
Things (IoT), nanotechnology, 3-D printing, more/better use of all kinds
of physical assets, from property to transport infrastructures and cars,
thanks to initiatives like Airbnb, Uber, and Lyft, the development of
smart cities and all types of intelligent buildings and infrastructures...
All things considered, it is quite likely that the breakthroughs of this
technological revolution will require less investment than that needed
in earlier tech boom periods. Let us compare, for example, the capital
investment needed to set up Amazon with the amount required to open
the countless bookshops and other establishments where purchases
had to be made in the past, or consider the effects of Airbnb and Uber
27
on investments in hotels and transport. Everywhere we turn, we find

evidence that the information revolution is turning out to be less capi-
tal-intensive than earlier “analogue” revolutions.
In fact, the information revolution may be reducing investment through
other channels: the accelerated pace of change itself and uncertainty
about how the technological revolution will affect different sectors and
industries may be dissuading many companies from making investments,
simply because they are not sure how, where, or in what they should
invest. Support for this theory is found in the fact that, at least in devel-
oped countries, companies are accumulating unprecedented amounts
of financial assets.
In short, despite the serious problems with our measuring instru-
ments, it could be true that the technological revolution has brought
investment levels down. But that does not necessarily mean that this
effect is permanent or that productivity will be low in the future, for
two good reasons.
First of all, at some point companies will decide to invest their liquid
assets or return them to shareholders, who in turn will seek profitable
investments for their funds. Secondly, many of the breakthroughs now
being announced in biotechnology, artificial intelligence, IoT, self-driving
cars, and other fields will eventually require much larger capital infu-
sions in order to realize their full potential.
Even if the information revolution needs relatively low levels of fixed
capital, this does not mean that it lacks the potential to boost produc-
tivity. Quite the contrary: it is hard to imagine that the information rev-
olution could create stagnation in the medium and long term. It seems
much more likely that, as in the past, scientific and technological pro-
gress will increase productivity and improve living conditions in the
medium and long term.
The global economy is undoubtedly facing what Robert Gordon calls
“headwinds”. Chief among them are the demographic issue and burgeon-
ing government debt, which would pose a much more serious problem
in a future without growth or inflation. Gordon also cites the plateau in
educational attainment since the 1970s (in developed nations) and rising
inequality, which means that a larger proportion of total income and
wealth is concentrated in the hands of those least inclined to spend it.
Even some of the economists who are most optimistic about the effects
of technological progress, like Brynjolfsson and McAfee (2013), have ex-
pressed concern, not over the future of global production but over the
28
future of employment: firstly, because demographic changes promise a

drop in the labour force participation rate; and secondly, because advanc-
es in technology herald the disappearance of a large number and variety
of existing jobs, whose current occupants will be replaced by robots or
simply deemed unnecessary as the stunningly rapid pace of technological
development increasingly allows us to meet our own needs without the
intervention of others. In fact, in both Europe (with the possible exception
of Spain) and the United States, fewer jobs are being created during this
economic recovery than in previous post-recession periods.
However, past experience tells us that the “new economy” may end
up creating a much greater number of “new jobs”. At the same time,
higher global productivity could eventually increase the amount of lei-
sure time available to each person. Nonetheless, it is impossible to know
what direction and how long this adjustment will take, because it largely
depends on the policies implemented to facilitate it. If the right meas-
ures are not taken, the transition phase could be very painful for many
individuals, industries, and geographical areas.
These types of concerns and radical changes in the economy and labour
market are nothing new. And despite the buffeting headwinds, the tailwind
of science and technology is potentially much stronger in the long term.
I say “potentially” because it is important to create the right conditions
for capitalizing on the positive effects of technological progress, solving
the global economy’s current problems, and facilitating or driving the
transition to a new environment.
As Barry Eichengreen (2014), one of the authors featured in this book,
has noted, if the global economy—or the economies of developed coun-
tries or, more specifically, the European economy—does experience
secular stagnation, it will be self-inflicted, signalling a failure to repair
the damage caused by the Great Recession and adopt effective policies
for boosting demand and correcting the structural flaws that pose a
hindrance to rising productivity and economic growth.
Europe’s Diminishing Global Clout
The preoccupation with secular stagnation—or, more generally, the pos-

sibility of a prolonged period of weak growth, with deflation and very low
interest rates—was fuelled by an observation of recent economic trends
in the most developed countries: the United States, Europe, and Japan.
29
However, the trend in emerging countries has been quite different. In

many of these economies, the effects of the crisis were much less severe
and recovery was swifter and more vigorous.
During the two decades leading up to the crisis, the growth differential
between emerging and developed countries had been three percentage
points on average, but it rose to nearly five points in 2010.
As a result, the global economic clout of emerging areas has continued
to grow. In 2004, emerging countries accounted for 46% of world GDP (at
PPP) compared to the 54% produced by developed nations. In 2007-2008,
they reached 50%. Today they represent nearly 60%, and within ten years
they will account for three-quarters of the world’s economic growth. Fur-
thermore, over 75% of global growth is concentrated in the Asia-Pacific
region (which includes Eastern Pacific coastal areas of the Americas).
THE WORLD’S ECONOMIC CENTRE OF

GRAVITY HAS CONTINUED TO DRIFT EASTWARDS
AT A SPEED NEVER SEEN BEFORE
Consequently, the world’s economic centre of gravity, formerly located

on the shores of the Atlantic Ocean, has continued to drift eastwards at
a speed never seen before.
Meanwhile, the major emerging economies—China, India, Russia, Bra-
zil, Turkey, Mexico, Indonesia, etc.—have gained power and influence on
the world stage (all of these aspects are illustrated on the page preceding
the third section of this book).
However, the recent problems of the Chinese economy and their effects
on oil and raw material exporters—countries already hard hit by the drop
in demand from developed nations—have narrowed the growth differen-
tial between emerging and developed regions by at least two points in 2015.
In this context, there is growing concern about the impact that a very
low growth scenario in developed countries might have on the future
growth of the rest of the world.
Although a situation of permanently debilitated demand in developed
nations would undoubtedly affect growth in emerging countries, it is
foreseeable that their demographic growth potential and cost advantag-
es will allow the process of income convergence to continue in coming
decades. In the medium term, however, there is a risk for emerging coun-
tries—at least for many of them—linked to the disruptive nature of new
technologies and the possible persistence of a “digital divide” between
30
the most and least advanced economies. Automation may eliminate the
advantages of low wage levels, and the availability of highly skilled work-
ers is more important when choosing a location for high added-value
business activities than any cost considerations.
Therefore, though emerging countries are less vulnerable to the risk
of a “secular stagnation” scenario, they have good reason to be wary of
this possibility and, of course, to avoid falling behind in the process of
technological change.
The Economic Policy Debate
The policies required to achieve these goals are not substantially differ-
ent from those needed in developed countries, although they do need
to be tailored to address the most serious shortcomings of emerging
countries, essentially with a view to promoting institutional stability and
governance, levels of education, and fiscal systems capable of financing
infrastructure improvements, reducing informality, fighting poverty, and
improving social cohesion.
But what policies should be adopted at the global level? The answer
depends on whether or not secular stagnation is a real risk.
A number of very radical policies have been suggested to overcome a
scenario of secular stagnation in which extremely low interest rates and
even major quantitative monetary easing proved insufficient to stimu-
late growth.
For example, some have proposed a reformulation of monetary policy,
raising the inflation target to, say, 4%, and of fiscal policy to create a much
stronger and more enduring stimulus, with the consequent increase in
debt. Yet these options could create very serious difficulties in the future
if the problem we are facing is not as acute and persistent as some fear.
There are also grounds for doubting their feasibility. For instance, if
inflation today is clearly below the target rate of 2%, is it plausible that
the announcement of a higher target would trigger a rise in inflation
expectations? As for fiscal policy, there is a limit beyond which debt
ceases to be sustainable; and, unfortunately, most developed countries
have already accumulated a massive debt stock that comes close—too
close, in some cases—to that limit.
On the other hand, it does seem possible (and necessary) to main-
tain current expansionary monetary policies for some time yet—even
31
intensifying them temporarily in some areas, like Europe—and to adjust

the correction of fiscal imbalances until such time as we begin to see
evidence of sustained improvement. These expansionary policies may be
combined with other measures that contribute to debt sustainability and
potential growth, such as raising retirement age or offering incentives
to hire members of social groups with lower employment rates.
There is a package of suitable measures for combating the global econ-
omy’s current problems, which would also have a very positive effect in
any future scenario.
I am referring to what are known as “structural reforms” to improve
infrastructures, increase market flexibility (including job mobility), sim-
plify the creation of new businesses, reform antitrust laws, stimulate
research and development, and—a crucial reform in the long term—
improve education.
At the same time, it is essential to create a suitable global framework
for migration. Immigration can be a very positive tool for helping to solve
the long-term problems of developed countries while simultaneously
addressing the needs of many less prosperous regions.
We also need to devise a free, balanced, and fair scheme for global trade
and investment flows. Within this scheme, it is vital to establish a set of
basic common rules for the development of the digital economy.
Finally, it is both possible and necessary to improve the efficacy of our
monetary policies. For any level of official interest rates, the most im-
portant rate to those seeking financing is the one they can obtain from
the banks or, in the case of large corporations, on the markets. When
the official rate cannot be lowered any further, the economy’s financial
conditions can be improved by increasing the efficiency of the financial
markets and intermediaries. This topic is the focus of the second part
of my article, and I will come back to it shortly.
Europe: A Critical Case?
In the ongoing debate about the severity and persistence of the prob-
lems that wreaked havoc on the global economy during the 2007-2008
financial crisis and the great recession that followed, the case of Europe
seems to be particularly serious; growth is very weak in comparison
with the United States, where concerns about secular stagnation were
first voiced.
32
In fact, British economist Nicholas Crafts (2014) has stated that this
preoccupation in the US might merely be a case of hypochondria, where-
as in Europe it may be a well-founded fear.
In his article for this book, Bart van Ark illustrates the correlation
between Europe’s slower growth and poorer productivity performance.
This, in turn, is linked to much less promising demographic projections.
In the case of Europe, in addition to these unfavourable base factors,
there are also a series of limitations and difficulties when it comes
to designing and implementing common policies with the necessary
agility and decisiveness, owing to its peculiar structure and weak gov-
ernance regime.
At this point in time, Europe does not have a unanimous opinion on how
much leeway exists for adopting a more expansionary monetary policy,
or for stimulating the economy with fiscal measures (although it must
be said that this leeway is different in each country and in some cases
is dangerously narrow due to the accumulation of heavy debt).
These difficulties in dealing with problems reflect a deeper political
and social division between different countries and even within each
country; some see the EU and/or the Eurozone as valid mechanisms
for stimulating growth and wellbeing, while others consider them part
of the problems that Europeans face today.
Confidence in the Eurozone is diminishing and, for the first time, a
member-state (the United Kingdom) has formally proposed a referen-
dum to decide if it wants to leave the European Union.
In other words, worsening prospects of future growth for Europe are
being exacerbated by a political and social crisis.
Even so, and despite the shortcomings of the EU’s institutional frame-
work, political discrepancies, and social tensions, the way that the Eu-
ropean Union and the Eurozone have reacted to their problems proves
that this project still has great resilience.
Though belated and far from comprehensive, very positive steps have
been taken on three critical fronts. The first is the creation of mecha-
nisms to help countries that find themselves in dire straits. This man-
aged to avert disaster in several nations of the European periphery,
which could have been fatal to the monetary union.
Secondly, the ECB has finally begun to wield its power as a very effec-
tive instrument for promoting growth and cohesion in the region. And
thirdly, a road map for the institutional reform of the Eurozone has been
clearly set out in the so-called Five Presidents’ Report, released in June
33
The retirement age reform has triggered resilience

within the EU. In the image, a worker over 65 years old.
2015. The stated objective of this plan is to achieve a true monetary

union in the next ten years, completing the banking union and moving
towards fiscal and political union.
Within this package of institutional reforms, significant progress has
been made in several areas, most notably the banking union. A sole su-
pervisor and a resolution fund are already in place. Two fundamental
pieces are still missing: the creation of a common last-resort financing
mechanism for that resolution fund and the design of a common deposit
guarantee scheme. However, substantial headway has been made, and
the extreme fragmentation of the Eurozone’s financial systems brought
on by the crisis has been drastically reduced.
The road ahead is long and arduous. Yet it seems clear that a more
integrated Europe has a better chance of weathering the storms its
faces—economic stagnation, political and social instability, and geopo-
litical irrelevance in the new world order now taking shape—than a
fragmented, divided Europe.
Certain critical problems can only be solved with common strategies
and programmes.
The demographic problem is the first and undoubtedly the most com-
plex, because it is especially acute in Europe and has built up a strong
momentum.
34
According to the United Nations, in the year 2000 there were four
people of working age (between age twenty and twenty-four) for every
person aged sixty-five or older in Europe. Today that proportion is nearly
three to one, and by 2050 it will be two to one. Even assuming a rise in
the birth rate and immigrant influx in the coming years, the proportion
of retired to working persons will remain high (in absolute terms and in
comparison with other parts of the world) and maintain its upward trend.
However, the effects of this tendency could be mitigated by strengthen-
ing the political and economic union. First of all, a stronger union would
facilitate a better distribution of the existing labour force within the Eu-
rozone, putting workers where they can be most productive and slashing
the general unemployment rate. Secondly, experience has taught us that
European agreements make it easier to undertake reforms that may
meet with resistance, such as raising retirement age. And it goes with-
out saying that a concerted European plan is the best way to maximize
the benefits and minimize the tensions derived from immigration flows,
which will be increasingly necessary in the years to come.
Reform policies aimed at stimulating productivity will remain in the
hands of national decision-makers, and predictably for quite some time,
until a very high degree of political integration is finally achieved (if it
ever is). Yet the gradual strengthening of the fiscal union will force na-
tional governments to increasingly rely on these instruments in order
to correct trends in their respective economies, as they gradually lose
the ability to act autonomously in other policy areas.
The scope of reforms for improving productivity in Europe is very
broad. In the first place, recent research (CompNet Task Force 2014)
has revealed that, within the Eurozone, there are enormous differences
between the most and least productive companies, and that productivity
distribution is heavily skewed, with a large number of relatively unpro-
ductive firms and a few highly productive enterprises.
For this reason, reforms designed to make labour markets more flex-
ible (Europe’s are clearly more rigid than in the US or the majority of
other OECD countries) and streamline the procedures for starting up
and winding down companies, which vary significantly from one country
to the next, could have a tremendous impact on productivity. Moreover,
these measures would encourage the free movement of both labour and
capital resources among countries, another way of increasing efficiency.
One OECD study (Bouis and Duval 2011) quantified the impact of a
broad package of structural reforms: it would increase the GDP of
35
uropean countries by around 11% in ten years (compared to a gain of

E
less than 5% in the United States).
In summary, Europe’s growth is being stunted by a number of highly
complex problems. But Europe also has the potential to make vast im-
provements and the capacity to take effective action. Structural reforms
can bring about a remarkable increase in the region’s productivity and
growth potential. And advances in the ongoing process of European
integration could be a very powerful catalyst for these reforms.
Specifically, a more integrated financial system would mean a better
allocation of resources in the region. In this respect, the banking union—
accompanied by steady progress towards the Capital Markets Union—
represents a structural reform that would lead to the creation of a more
open, competitive, and efficient European financial market. Every new
step taken in this direction is particularly important today for reducing
the cost of capital and improving the transmission of monetary policy
in a context where official interest rates are currently at zero.
The Imminent Revolution of the Banking Industry
As it heads into that integration process, the European banking industry

undoubtedly finds itself at an especially difficult juncture. The current
scenario is marked by, on the one hand, very low interest rates and an
extremely flat yield curve, and on the other, very sluggish credit demand,
primarily owing to the situation of low economic growth and the ongoing
process of corporate and household deleveraging.
In addition, banks must now operate in a much stricter regulatory
environment. The new regulations enacted after the 2007-2008 crisis,
while undoubtedly serving to stabilize the system, have a negative effect
on the banking industry’s capacity to grow and generate profits. These
are not transitory factors; the economic pillars of the banking business
have changed in such a way that, for the foreseeable future, banking will
grow at a slower pace and be less profitable than in the past.
These problems are not limited to European banking. Economic
growth and rates are low in all developed regions, and regulations are
tougher across the globe. However, in Europe the demographic and
growth prospects are more worrisome.
This problem is not unique to the banking industry. As experts have
repeatedly pointed out, the current situation poses an obstacle to
36
onetary policy transmission and increases the cost of capital, under-

m
mining the efficacy of the ECB’s efforts to spur growth. The European
banking system therefore needs to dramatically improve its efficiency.
One method of improving efficiency and profitability, used frequently in
every industry, is consolidation. Like other developed regions, Europe is
witnessing the gradual consolidation of its banking sector, a process that
picked up speed when the financial crisis hit. But this process is still pro-
ceeding very slowly and cannot keep up with the mounting pressure on
OVER THE PAST FIFTEEN YEARS, NEITHER

THE SINGLE MARKET NOR THE EURO NOR THE
FINANCIAL CRISIS HAVE MANAGED TO RADICALLY
ALTER THE EUROPEAN BANKING MAP
the banking business. In the countries that now form the European Union,
there were approximately 9,500 banks in 2001 (i.e., at the beginning of the
century); today, after fifteen years of a single market, advances in integra-
tion, and a severe financial crisis, over 7,100 banks still remain. In other
words, the number has been reduced by 25%. In Eurozone countries,
which have the additional factor of a common currency, in 2001 there
were around 7,700 banks, and today there are 5,500, meaning that the
ranks have been thinned by less than 30%. Statistics on the diminishing
number of banks are similar or even slightly higher in the US.
It should also be noted that most of the eliminated banks were very
small, so the reduction in installed productive capacity was actually even
less significant. And there have been very few cross-border acquisitions
or mergers.
In summary, over the past fifteen years, neither the single market
nor the euro nor the financial crisis have managed to radically alter
the European banking map, although certain countries (Spain, for one)
where the banking crisis was especially severe have registered a higher
level of consolidation. Progressing towards a European banking union
and increasing pressure on margins and growth could accelerate this
process, but it is highly unlikely that consolidation alone will suffice to
achieve the substantial improvements in efficiency required today. In
the past, political and regulatory issues were the primary obstacles to
consolidation; now, these are joined by the fact that, for most banks,
inorganic growth operations are less of a priority than the need to meet
regulatory requirements and revise their business models.
37
Of course, another mechanism for increasing income and margins is

branching out into other areas with better growth prospects and higher
interest rates. But this is not an option for all banks, and it is also affect-
ed by the existence of the abovementioned priorities.
There is, however, another much more powerful factor, which simul-
taneously demands and facilitates a swift, substantial improvement in
the efficiency of the financial system: technological progress.
Technological change has already forced a large number of industries—
communications, the media, music, travel, different distribution sectors,
etc.—to reinvent themselves and reap staggering gains in productivity
and efficiency thanks to the network economy, a dramatically reduced
need for physical investments, and the relative ease of reaching a global
audience, among other factors.
The financial industry has certain features that make it a prime candi-
date for a radical IT-based switchover, because its basic raw materials
are data and money. And money can be turned into accounting ledger
entries—in other words, data.
For this reason, I have long been convinced that banking, and the fi-
nancial industry in general, is due for a radical and rapid change.
While significant changes have transpired over the last two decades,
they are not comparable to the revolutions we have seen in other sec-
tors. This can be chalked up to a number of factors: the historically high
levels of customer trust in banks; the industry’s high rates of return and
growth (up until the financial crisis) which discouraged experimentation
THERE IS A NEW GENERATION OF CONSUMERS WHO HAVE

GROWN UP IN THE DIGITAL WORLD AND DEMAND OTHER
SERVICES AND OTHER WAYS OF ACCESSING THEM
and change; the fact that, until quite recently, banks probably did not
put enough effort into developing the infrastructures they needed to
harness the full potential of new technologies; and, of course, regulation
that limited the freedom of institutions to engage in disruptive innova-
tion and protected them from the possible competition of newcomers.
But all of this is changing, and now, at long last, the banking industry
has embarked upon a rapidly accelerating transformation process. The
economic foundations of the business have changed for the worse, mak-
ing transformation even more urgent and necessary. But customers are
also changing: the crisis severely tarnished the reputation of banks and
38
shook people’s trust in them. Most importantly, today there is a new

generation of consumers, people who have grown up in the digital world,
who demand other services and other ways of accessing them, and who
are willing to accept banking services from other companies: recent sur-
veys reveal that between one quarter and one half of all US consumers
would, if they were offered, pay for financial services provided by firms
like PayPal, Apple, Google, or Amazon, or by major telecom companies.
Meanwhile, infrastructure improvements are accelerating the spread
of technological innovations. We are already at the stage where new-fan-
gled innovations have an immediate and visible impact on the daily activ-
ities of people (and, therefore, on banking activity). And this in turn ac-
celerates technological development, resulting in so-called exponential
technologies: smartphones, blockchain technology, artificial intelligence,
natural language processing, cloud computing, biometrics, IoT, big data...
all of this is going to radically alter the banking industry. I am not talking
about things that will happen in some unknown or distant future. They
are happening right now. Hundreds of startups are already attacking
different links in the banking value chain. These companies, unburdened
by the “legacies” of costs that banks carry, take full advantage of tech-
nology and their own flexibility and low costs to offer customers a better
experience at very low prices: payments, loans, share purchases/sales,
and asset management are probably some of the areas under heaviest
attack. But initiatives with tremendous potential to shatter the status
quo are also making inroads in insurance, deposits, risk management,
cybersecurity, capital markets, and other fields.
Just as it happened in other sectors, these new “fintech” initiatives
are growing by leaps and bounds. In 2014, they attracted investments
amounting to over 12 billion dollars, three times more than the previous
year. And in the first half of 2015, investments in fintechs were estimated
at more than 13 billion dollars, already exceeding the amount invested
over the entire previous year. Many of these firms are not so small an-
ymore. Recent estimates indicate that more than thirty of them have
attained “unicorn” status, a term used to describe companies with a
valuation of 1 billion dollars or more. And this number is going to double
or triple each year.
Hardly any segment of the banking industry has escaped the invasion
of these new competitors, and virtually no domestic market is “safe”
from them. This is true because their activity is global—if not now, at
least potentially—and because important developments are not limited
39
to the United States (where about 60% of these firms are located). An-
other 20% are established in Europe, and there is considerable activity in
the emerging world. China, India, Latin America, and even Africa have
some very interesting proposals, largely aimed at providing banking ser-
vices at a very low cost to the extremely high proportion of the world’s
population with low income levels, for whom conventional banking is
not affordable.
These companies could have a very strong impact on bank income and
profits in the medium term. A recent McKinsey report (2015) estimates
that banks could lose 40% of their profits in consumer finance, 30% in
payments, and 25% in loans to SMEs.
However, the majority of these new competitors in the banking/finan-
cial industry rely on conventional banks to “deliver” their services. In
most cases, they lack the organization and/or financial capacity to offer
an end-to-end service. As Marc Andreessen, co-creator of Mosaic and
Netscape and now a venture capitalist in the field of technology, recently
said, fintech companies “are reinventing the user experience but not
‘the whole thing’”.
Even the big digital corporations (Amazon, Google, Apple, etc.) that
are already combining their range of products and services with certain
financial services have so far been reluctant to offer a broad, complete
range of banking solutions, primarily because they would rather not
have to comply with the industry’s strict regulations.
But all of this will change. And banks that hope to prosper in this new
technological world have to react quickly, because the window of oppor-
tunity that is open today will close at some point.
For some, no doubt, it is already too late. The pressure of technological
progress will be the true driver of the sweeping consolidation that this
sector must undergo. More importantly, it will be the driver of a dramatic
improvement of productivity and efficiency in banking, on the same scale
as that experienced in other already “digitized” industries. And all of this
will benefit investment, economic growth, and, ultimately, the consumers.
We are already moving towards a new banking industry, and this pro-
cess involves several very different agents.
On the one hand, we have “conventional” banks, which on the plus side
have the vast majority of customers and a wealth of information on them,
production and distribution infrastructures, the licences required by reg-
ulations, and financial resources. But they are also burdened by very in-
flexible, costly structures, cumbersome processes, and obsolete corporate
40
A group of PayPal workers in front of the

Nasdaq headquarters in New York.
cultures and they are far removed from the arena where the latest tech-
nologies and the most disruptive innovations are being developed.
On the other hand, we have newly-formed companies that are highly
agile and flexible, creative, innovative, and in tune with the technological
world. What they do not have are customers or the infrastructure needed
to get them, a consolidated brand, significant financial resources, or ex-
perience in the banking business to broaden their initial scope of activity.
Finally, we have the big names in online business, with customers, a
brand, and the resources to make up for any lack of infrastructure or
experience they might have, but for whom financial services are not a
top priority (undoubtedly because of their reluctance to enter such a
tightly regulated sector).
These three groups are the key components of the new digital banking
ecosystem that is beginning to take shape. The million-dollar question
is: who will be at the centre of this ecosystem? Or, to put it another way,
who will “own” the customers?
Few banks will be able to fill this position, because it requires a long,
complicated, and costly process that will entail not only a radical tech-
nological transformation but also a profound organizational and cultural
change. Consequently, many banks will disappear; others will become ge-
neric brands, providing infrastructure services for other financial firms;
41
and a few will evolve in time and become information and software com-
panies that offer a much wider range of products and services (including
non-financial services), capable of making a radically different and better
customer value proposition with the ultimate goal of providing the best
possible experience for each individual customer.
The banks that conclude this transformation most successfully will
become the “regulators”, owners, and managers of a very wide and het-
erogeneous platform, on which “banking” will interact and cooperate
with a large number of specialized suppliers and with the customers,
turning data into knowledge that will allow them to design and deliver
the best solutions and the best experience to each customer.
The Transformational Experience of BBVA
This is what we at BBVA understand by the term “digital transforma-

tion”. And this is what we are doing.
Of course, this does not mean we neglect our day-to-day business con-
cerns: we are one of the most efficient and profitable big banks in the
world, and we have increased our market share in Spain in the consolida-
tion process following the financial crisis. We have also established a sol-
id presence in regions with better prospects than Europe for long-term
growth: the US, Mexico and other Latin American countries, Turkey,
and East Asia are currently key markets for our group.
But the pillar of our strategy, our vision, and our future is digital trans-
formation. In my article for the book added to this collection last year
(González 2014), I described the foundations of this transformation and
the process it has followed, so here I will simply offer a very brief over-
view and explain the latest advances.
At BBVA, we describe this transformation by likening it to the process
of building a house: in that digital “house”, the foundation is technology;
the floors and walls are processes, products, organizational structure,
and corporate culture; and the roof represents the channels or points
of contact with our customers.
With regard to the foundation, after eight years of hard work, at BBVA
we now have a modular, scalable, state-of-the-art technological platform
that is already fully functional. This platform is capable of processing the
exponentially growing number of transactions we will have to handle as
the digital revolution sweeps across the banking industry. It also gives
42
us an advantage over the vast majority of other banks, because most of

them are still operating in what Professor Weill from MIT calls “spaghet-
ti-like” IT landscapes, technological platforms designed in the 1970s that
they have attempted to update with countless patches, modifications,
and add-ons. Such platforms are not up to the task of handling the vol-
ume and increasing complexity of future data processing requirements.
Today, our platform lets us work in real time; manage an ecosystem
open to third parties (other service providers); deploy much more so-
phisticated cybersecurity and data protection architecture; glean much
more knowledge from our raw data; and turn that knowledge into prod-
ucts and services, drastically reducing our time to market.
However, the technological platform is not the answer to everything. It
is merely a tool in the hands of people, one that enables them to design
and build a better customer experience.
Once the foundation has been laid, we must put in the walls and floor
slabs. This translates into a transformation of operations and process-
es. And to effect that transformation, a new organizational structure
is needed.
For this reason, in 2014 we created a Digital Banking Division endowed
with broad powers and substantial resources for accelerating the trans-
formation. This decision had positive results that motivated us to go one
step further: a year later, in May 2015, we completely reorganized BBVA’s
management structure, and the head of our Digital Banking Division
became the COO.
From that moment on, “Digital” BBVA has led the process of trans-
forming the entire group, heading up a structure with two basic objec-
tives: first, to boost results in all of the group’s business areas in the
medium and long term, and second, to endow our group with the means
(human and technological resources) to successfully compete in the new
digital banking industry.
Of course, in these years we have also taken measures to improve our
roof, the channels through which our products and services are distrib-
uted. Today, our digital channels serve 14 million customers (over 20% of
our total client base), including 7.5 million customers via mobile phone.
These channels are growing rapidly and proving to be a highly effective
method for increasing sales of loans, consumer products, pension funds,
and other products.
At the same time, we are establishing different collaboration schemes
with fintech startups and developers: we have opened up our platform
43
to some of them (Dwolla, for one); we have partnered with others on

different development projects; we have acquired startups that offer us
special capacities and knowledge; and we have created a venture capital
fund to invest in innovative firms in our industry.
All this is helpful for our transformation, but the most important factor
is involving all of our employees in the process. To this end, we com-
pletely overhauled our Human Resources Department (now the Talent
and Culture Division), which has the mission of creating a more flexible,
agile, enterprising corporate culture.
At BBVA we are always evolving and improving our digital house. We
have come a long way, and I believe we are in a position to lead the trans-
formation of our industry and become one of the world’s first knowledge
banks (and hopefully the best), fully integrated in the digital ecosystem.
Even so, we know that much work remains to be done; our transforma-
tion is far from complete. In any case, the pace of technological change
is still accelerating, and society continues to change.
Digital transformation is a race that has no finish line or predeter-
mined courses. The rulebook for the digital banking industry has not
even been written yet.
The Future of the Financial Industry:

Regulation and Digital Transformation
Regulation is a crucial issue that will determine, in one way or another,

the future course of the digital banking industry.
Today’s technologies have tremendous disruptive potential and offer
countless opportunities to improve the quality, convenience, and cost
of financial services. This would be highly beneficial for consumers in
Europe and round the world, especially the billions of low-income indi-
viduals who currently do not have access to financial services. At the
same time, a more efficient system will bring down the cost of capital,
boosting investment and growth.
However, in order to realize those potential benefits, we need proper
regulation. Today the digital banking industry is practically unregulat-
ed. Consequently, we are left with a vast no-man’s land in such crucial
matters as macroeconomic and financial stability, the spread of shad-
ow banking, consumer protection, data privacy, cybersecurity, and the
issues of money laundering and financing illegal or criminal activities.
44
Two different types of agents are operating in the financial industry

today: the traditional players, the banks, whose activity is governed by
very tight, exacting regulations; and the new digital players, who have
a much more permissive set of rules or no rules at all. This gives one
team a huge competitive advantage over the other, in a highly favourable
situation for the development of the industry segment flying below the
radar of regulators and supervisors.
Until now, these watchdogs have not kept pace with changes in the in-
dustry. The financial crisis and all its consequences and ramifications have
been, quite understandably, their principal and practically only concern.
But this has to change. In fact, it is already starting to change. It is
important to develop a system to regulate and supervise digital financial
activities, a system that will have to strike a difficult and delicate balance
in several areas.
First of all, it must strike a balance between stability and efficiency,
establishing an appropriate degree of control without suffocating in-
novation and combining the need to protect consumers from potential
harm with the need to maintain the benefits of better costs and greater
convenience for them.
Secondly, balance must be achieved in the conditions of competition
between banks and digital newcomers. Regulation should allow banks to
use technology to offer their customers better, cheaper, and more con-
venient services. At the same time, newcomers should be regulated to a
certain extent, depending on the kind of business activities they pursue.
And all of this should be done at the global level, because digital bank-
ing is, and can only be, global. This is certainly a daunting task, but an
absolutely necessary one if we want to guarantee future financial and
macroeconomic stability and harness the vast potential of technology to
boost productivity, growth, and personal wellbeing.
RELATED ARTICLES:
Europe’s Growth Model in Crisis
Transforming an analog company

into a digital company: the case of BBVA
Knowledge bankins for a connected society
45
T H E E U R O C RI S I S AND TH E FUTURE O F EU R OPEA N IN TEGR ATION
PETER A. HALL is the Krupp For decades, the European Union has been a
Foundation Professor of Euro- vehicle for peace and prosperity in Europe, but
pean Studies at the Minda de
Gunzburg Center for European it is in trouble today. The response to the crisis
Studies at Harvard University has had negative economic and political ef-
and a Centennial Professor at
the London School of Economics. fects. The decision to subsidize debt in return
He is the author of Governing for austerity has stymied growth in southern
the Economy and more than a
hundred articles on European Europe. Although European elites favor
politics and comparative polit- deeper integration, the response to the crisis
ical economy. His many edited
works include Varieties of Capi- has reduced popular support for it. A deeper
talism (with David Soskice) and fiscal union threatens to intensify technocracy.
Social Resilience in the Neoliberal
Era (with Michèle Lamont). However, the Euro may endure without deeper
union provided some institutional reforms are
consolidated and economic growth can be
revived in southern Europe.
46
THE EURO CRISIS AND THE FUTURE

OF EUROPEAN INTEGRATION
From a long-term historical perspective, the European Union is one of

the most distinctive political creations of the late twentieth century–a
vehicle for supranational cooperation just short of a political federation
but more robust than an international regime. After half a century
marked by economic depression and two world wars, the economic
community established by the 1957 Treaty of Rome became the vehicle
for one of the longest periods of peace and prosperity the European
continent has ever enjoyed.
However, the European Union is in trouble today, seemingly unable
to deliver the peace and prosperity that has always been its promise.
The long-running Euro crisis is the most prominent manifestation of its
problems. A slow-moving debacle, the crisis has laid bare the fault lines
of the European Union. But the problems with which the EU must cope
extend well beyond it. Annual economic growth among the 28 member
states now in the EU was lagging well before the crisis, at 2.6 percent
versus the 3.3 percent growth rate in the U.S. between 1997 and 2006.
THE EUROPEAN UNION IS

SEEMINGLY UNABLE TO DELIVER
THE PEACE AND PROSPERITY THAT
HAS ALWAYS BEEN ITS PROMISE
Moreover, low birth rates will make it difficult for Europe to achieve
high rates of economic growth in the coming years. The old-age depend-
ency ratio in the EU is expected to double by 2080, leaving only two
people of working age for each one over the age of 65. Immigration of-
fers a solution to that problem, but it is meeting fierce resistance in the
polities of Europe, where radical right parties opposed to immigration
and the policies of the European Union are on the rise. The EU itself
lacks an effective policy for coping with boatloads of refugees crossing
the Mediterranean in unprecedented numbers.
47
Meanwhile, the European Union’s record as a guarantor of peace and

democracy in Europe is being tarnished by its inability to prevent a re-
surgent Russia, under Vladimir Putin, from absorbing pieces of Ukraine
or to deter Hungary, one of its own member states, from sliding back
towards semi-authoritarian rule. Of course, Europe has always faced
challenges, but to many people, the European Union now seems to be
part of the problem rather than the solution. In order to understand
why, we need to look back at the evolution of European integration.
The Evolution of the European Union
From its inception in the European Coal and Steel Community of 1951,
institutional integration in Europe has always been multiply motivated.
On the one hand, for some, it has been animated by the ideals of an
“ever closer union” culminating in the European polity envisioned by
its founders, Jean Monnet, Robert Schuman, and Alcide De Gaspari.
On the other hand, integration has moved forward only when national
governments could see how European institutions would serve their
own country’s interests.1
EACH NEW STEP TOWARD

INTEGRATION HAS BEEN BASED ON LONG
TERM GAINS, EVEN IF THEY REQUIRED
SHORT-TERM SACRIFICES
Conceptions of national interest are circumscribed by economic and

geopolitical conditions, but they are ultimately a social construction. As
such, they are affected by the discount rate that governments attach
to future gains, by officials' confidence in how a new set of institutions
will function, and by a government’s sense of the opportunity costs of
moving in one direction rather than another.2 In this respect, visions
of what Europe could be influence the pragmatic decisions taken to
get there. Charles de Gaulle was not the only leader motivated by une
certaine idée de l’Europe.
1 A. Moravcsik, The Choice for Europe (Ithaca: Cornell University Press, 1998).
2 J. Goldstein and R. Keohane, eds., Ideas and Foreign Policy (Ithaca: Cornell University
Press, 1993).
48
Therefore, European integration has often been served by a certain

“constructive ambiguity” about what its next steps would mean for each
of the member states. For the most part, however, each new step to-
ward integration has been based on the perception that it would offer
the member states positive-sum returns, namely, long-term gains for
all, even if they required short-term sacrifices by some. This point is
important for understanding the dilemmas Europe faces today.
During the 1950s and 1960s, European integration offered gains that
were relatively clear. The European Economic Community provided a
vehicle for economic reconstruction and peace in Western Europe. A
generation decimated by war took those as superordinate goals. The
Single European Act of 1986, which was to create a single continental
market by 1992 on the basis of qualified-majority voting, was presented
as a means to secure prosperity after a decade of Eurosclerosis.3 The
member states knew that liberalization would require some sacrific-
es but were persuaded that the long-run outcome would be greater
prosperity for all.
In large measure, these ends dictated the means used to secure them.
Since its core objective was greater economic efficiency, the European
Community of the 1960s and 1970s was designed and presented largely
as a technocratic enterprise. Of course, national governments retained
the final say, and the Community acquired a patina of popular partic-
ipation when the European Parliament became an elected body. But
the actions of the European Community were legitimated largely by
reference to their technical efficiency. The committees of the Council
were enjoined to base their decisions on technical expertise, and the
Commission justified its proposals on the basis of economic efficiency.4
As the ambit of European decision-making expanded, however, cracks
began to appear in this facade. When the EC focused on narrow realms
of regulation with few distributive consequences, its policies could be
justified on the grounds of technical efficiency. But, after the Single
European Act, the liberalizing regulations of the EU began to affect
large segments of the workforce, generating losers as well as winners.
European officials had complained for decades that their efforts went
3 N. Jabko, Playing the Market (Ithaca: Cornell University Press, 2006).
4 C. Joerges and J. Neyer,. ‘From Intergovernmental Bargaining to Deliberative Political
Processes: The Constitutionalisation of Comitology,’ European Law Journal 3 (1997):),
273-99.
49
unnoticed. Suddenly, they acquired much higher political visibility, and

people who felt disadvantaged by liberalization or globalization began to
blame their fate on the EU. The result is a legitimacy crisis from which
the European Union has yet to emerge fully.
Of course, democratic governments often allocate gains and loss-
es among social groups, and they legitimate those decisions on the
grounds that the last elections gave them a mandate to do so and the
next elections will hold them accountable for their actions. This is the
basis for the “political capacity” of democratic governments in contexts
where “to govern is to choose.” But the European Union lacks such
political capacity. Its Commission is unelected, and its Council strikes
deals under a veil of secrecy for which none of its members can readily
be held accountable.5
In the treaties of Maastricht and Lisbon, the response of the Euro-
pean Union to this legitimacy crisis was to increase the powers of its
Parliament while extending the jurisdiction of the EU even further. But
complex decision-rules obscure the role of the Parliament, and elections
to it are generally decided on national rather than European issues, in
the absence of a cohesive continental electorate or Europe-wide par-
ties. In the eyes of many of its citizens, the EU continues to look like
a technocracy. Europe suffers from the kind of sharp divide between
the pays légal and the pays réel once said to have characterized France
during the Third Republic. As a result, the legitimacy of the EU turns
heavily on its capacity to promote prosperity across the continent.6
That is why the Euro crisis raises deep political as well as economic
dilemmas for Europe.
The Origins of the Euro Crisis
Like all such initiatives, the decision to establish the Economic and
Monetary Union in Europe was multiply motivated: EMU was both
an economic and political construction. Officials, such as Jacques De-
lors, the president of the European Commission, saw EMU as a way
to deepen the single market. President François Mitterrand of France
hoped monetary union would reduce the influence that the German
. Cox, What’s Wrong with the European Union & How to Fix It (Cambridge: Polity, 2008).
5 S
6 F. W. Scharpf, Governing in Europe (Oxford: Oxford University Press, 1999).
50
Bundesbank held in the prior European monetary system. Chancellor

Helmut Kohl of Germany saw it as a way to bind a newly-unified Germa-
ny to Europe, ensuring its trading partners could not gain advantages
over German products by devaluing their currencies. Each leader had
reasons for pursuing monetary union, even though economists warned
that Europe was not an “optimal currency area.” It lacked the capacities
to adjust to economic shocks conferred by high rates of labor mobility
and social insurance schemes capable of automatically redistributing
revenues to regions suffering from recession.7
THE ECB WAS CHARGED WITH

MAINTAINING FINANCIAL STABILITY BUT FORBIDDEN
FROM PURCHASING SOVEREIGN DEBT
The institutions constructed for the new monetary union were mini-
mal at best. The new European Central Bank was charged with main-
taining financial stability but forbidden from purchasing sovereign debt.
Therefore, it lacked the tools most central banks wield for fending off
speculative attacks in the bond markets. The premise was that mon-
etary union should never entail transfers between the member states,
thereby establishing monetary solidarity without any corresponding
foundation of social solidarity, a flaw that was to haunt it in future years.
Despite these limitations, the single currency worked well enough for
the European Commission to declare, ten years after its establishment,
that “The single currency has become a symbol of Europe, considered
by euro-area citizens to be among the most positive results of European
integration.” Within months, however, the Euro crisis had erupted. So
what went wrong? Why did Europe face a sovereign debt crisis from
which it has yet to fully emerge?
The basic answer is that Europe suffered from the same kind of profli-
gate lending and borrowing, fueled by new types of financial derivatives
and light-touch regulation, which precipitated a financial crisis in the
U.S. and global recession in 2008. The most egregious case is that of
Greece, whose revelation, in October 2009, that its budget deficit would
be almost three times the projected level (later found to be 15.6 percent
of GDP), touched off the crisis of confidence in sovereign debt. As skittish
7 For a review, see: F. P. Mongelli, ‘New Views on the Optimum Currency Area Theory:
What is EMU Telling Us?” ECB Working Paper no. 138, 2002.
51
investors bailed out of Greek bonds, contagion spread to Ireland, Portugal,

and Spain, where private sector lending had expanded exponentially on
the back of asset booms in housing and construction, even though levels
of public debt were relatively modest. In many respects, the problems in
these countries paralleled those in the United States. But, unlike the U.S.
or U.K., they did not have a central bank prepared to purchase sovereign
debt. Instead, they began the torturous process of negotiating rescue
programs with the ECB and EU.
MANY OF THE PROBLEMS FACING

THE EU FLOWED FROM THE INSTITUTIONAL
ASYMMETRIES IN THE POLITICAL ECONOMIES
OF ITS MEMBER STATES
Beneath the surface, however, the Euro crisis reflected some of the
structural dilemmas of operating a single currency that encompassed
multiple varieties of capitalism. The monetary union joined together
states at different levels of political development and political econo-
mies structured in quite different ways. Many of the problems facing
the union flowed not from the asymmetric economic shocks that opti-
mal currency theory anticipated, but rather from institutional asym-
metries in the political economies of its member states.8 The Stability
and Growth Pact limiting public debt and deficits was hard to enforce
and little more than a fig leaf covering these structural differences.
Some believed that the experience of competing within a monetary
union would gradually erase these institutional asymmetries, but they
have deep historical roots that do not yield easily to incremental reform.
Among the most important differences in the organization of the
political economy are those that distinguish the “coordinated market
economies” of northern Europe, including Germany, Belgium, Austria,
Finland, and the Netherlands, from the “Mediterranean” of southern
Europe, including Spain, Portugal, Greece, and Italy.9 Germany is a clas-
sic example of these northern European economies. With well-devel-
oped trade unions and employers' associations organized along sectoral
lines and accustomed to bargaining with one another, it has the capacity
8 A . Boltho and W. Carlin, “The Problems of European Monetary Union: Asymmetric

Shocks or Asymmetric Behaviour?” http://www.voxeu.org/article/problems-eurozone.
9 P. A. Hall and D. Soskice, Varieties of Capitalism (Oxford: Oxford University Press, 2001).
52
Germany based its growth on export. In the image, the port of Hamburg.
to hold down unit labor costs in the interest of promoting exports. An

elaborate system of vocational training operated by these producer
groups and underpinned by works councils in large firms, gives German
firms significant advantages in the production of high-quality and high
value-added goods for which export demand is relatively stable. Like
its northern neighbors, Germany was institutionally well-equipped to
operate an export-led growth strategy.
By contrast, the political economies of southern Europe are organized
quite differently. Spain, Portugal, Greece, and Italy developed fractious
labor movements divided into competing confederations, which face rel-
atively-weak employers' associations that allow for periodic social pacts
but make sustained wage coordination difficult. As a result, under EMU,
foreign competition held down wages in the export sectors, but rising
wages in the sheltered sectors raised unit labor costs in the economy
as a whole.10 These countries also lack the institutional capacities for
coordinated skill formation that make high value-added production and
continuous innovation more feasible. As a result, more of their firms
relied on low-cost labor, and after 1989, their exports were hit hard by
low-cost competition from East Central Europe.
10 B. Hancké, Unions, Central Banks and EMU (Oxford: Oxford University Press, 2013).
53
Monetary union had different implications for these two types of

political economies. Inside EMU, the countries of northern Europe
could pursue their longstanding export-led growth strategies. The
ECB helped by keeping a close eye on German wage settlements, and
Germany’s neighbors targeted the latter to hold down their own wages.
Moreover, they now enjoyed new advantages because their neighbors
could no longer devalue against them, while the variegated member-
ship of the union held down the external exchange rate of the Euro. As
a result, the trade surpluses of northern Europe began to grow, in the
case of Germany dramatically.
However, entry into monetary union posed serious dilemmas for the
countries of southern Europe. In the years before Maastricht, with-
out capacities for coordinating wage bargaining, they had often relied
on periodic devaluations of the exchange rate to reduce the prices of
their products vis-à-vis foreign competition. Under EMU, they lost this
capacity for economic adjustment just when emerging economies be-
gan to eat into their market share for exports of low-cost goods. The
alternative route to growth for these economies lay in the expansion of
domestic demand. Entry into EMU rendered this strategy even more
attractive because it lowered the cost of capital in southern Europe, as
investors from the north sought sites in which to invest their growing
trade surpluses. However, the natural concomitant to a growth strategy
led by domestic demand is wage and price inflation, which the one-size-
fits-all monetary policies of the ECB could not contain without pre-
cipitating recession in northern Europe. As inflation reduced the real
cost of capital, asset booms drew resources away from export sectors
already struggling with rising prices for inputs.
In short, one of the effects of monetary union was to encourage a set
of unbalanced growth paths that saw the export sectors of northern
Europe expand often at the expense of domestic consumption, while
many export sectors in southern Europe languished alongside growing
sheltered sectors, often dominated by construction. To blame these
outcomes on southern European governments, as some do, is to ignore
ineradicable differences in the organization of the political economies
and the ways in which they provide countries with different types of
adjustment mechanisms. For the most part, southern European gov-
ernments pursued the growth strategies most available to them and
often with considerable success. Between 1997 and 2007, Spain and
Greece grew at rates close to 4 percent per year. More should have been
54
done to dampen construction booms and ensure the solvency of the

banks funding them, but to expect southern Europe to have emulated
the growth strategies of the north is to misunderstand how export-led
growth is achieved.
THE MONETARY UNION

ENCOURAGED UNBALANCED GROWTH
PATHS WHICH FAVOURED THE EXPANSION
OF EXPORTERS IN THE NORTH
In the case of Greece, the structure of the polity was equally impor-
tant to the origins of the crisis. Greek governments used flows of funds
from the north to fund consumption rather than investment, often in
order to shore up political support for the ruling party among public
employees and pensioners.11 Greece lacked the administrative capacities
to collect and spend funds effectively: tax evasion may have accounted
for half of the budget deficit reported in 2008. Clientelism was a prob-
lem elsewhere in southern Europe, as it is in parts of the north, but in
Italy, Spain, and Portugal, product market regulation was reduced as
much or more during the early 2000s as it was in most countries of
northern Europe.
The Response to the Euro Crisis and its Consequences
The crisis of the Euro began in 2010 when international investors, al-
ready skittish as a result of the American banking crisis, lost confidence
in the ability of European banks and sovereigns to repay their debts.
The same herd instincts in the financial markets that had lowered the
cost of capital in southern Europe suddenly raised its cost across much
of the continent. In any circumstances, this would have been a diffi-
cult moment, but the single currency lacked any effective institution-
al mechanism for adjustment. Although the ECB gradually invented
ways of providing emergency liquidity to banks under stress and finally
restored confidence by announcing in mid-2012 that it was willing to
buy sovereign debt on the secondary markets, initially, it was unable
11 M
. Mitsopoulos and T. Pelagidis, Understanding the Crisis in Greece (Houndmills: Pal-
grave Macmillan, 2012).
55
to purchase government bonds in order to stave off panic in sover-

eign debt markets. A Eurozone built only on a minimalist set of rules
had no centralized fiscal capacities of its own and limited abilities for
decision-making, which depended on reaching unanimity among its
member governments.
WITH THE RESCUE, GERMANY WAS

ENSURING THAT LOANS MADE BY ITS OWN FINANCIAL
INSTITUTIONS WOULD BE REPAID
In this context, the fact that European governments were eventually

able to assemble rescue packages for the Greek, Irish, and Portuguese
governments, as well as a credit line for Spanish banks, is a striking
achievement, reflecting unprecedented levels of intergovernmental co-
operation. Paradoxically, however, the torturous process whereby that
cooperation was secured put strains on the European system of gov-
ernance that threaten the prospects for further European integration
in the coming years.
The initial fateful choices concerned Greece, which was running out of
money in 2010 and unable to borrow at affordable rates on international
bond markets. Runaway public spending over the previous decade had
fueled rapid rates of economic growth but taken public sector deficits
and debt to dangerously high levels. Its partners in the Eurozone faced
a choice. They could organize a restructuring that would see Greece de-
fault on much of its debt, perhaps accompanied by some financial sup-
port to ease the pain as the country moved toward a primary surplus.
Or, they could lend Greece the funds to continue making payments on
its debt in return for promises of reform designed to bring the country
back to fiscal stability.
Neither option was an attractive prospect. In either case, the Greek
people would suffer greatly as the government cut spending to elimi-
nate a deficit worth 12 percent of its GDP. Prominent economists urged
restructuring on the grounds that it was the best way to cope with a
debt crisis and best done early. Some argued that adjustment would
be more successful if the country also left the Euro and devalued its
currency rather than rely entirely on internal deflation to reduce real
wages to internationally-competitive levels.
However, the member states of the European Union chose the alter-
native route, assembling two bailout packages, in May 2010 and July
56
2011, which provided the Greek government with about €225 billion in
return for its adherence to stringent conditions designed to reduce
its outlays and increase its revenue in order to improve the prospects
that the funds would be repaid. A third loan, worth about €86 billion,
followed in 2015. Historians will long debate why this path was chosen
over the default. Amidst the uncertain financial circumstances of 2010,
governments were clearly concerned about the possibility of contagion.
If a state within the single currency had defaulted, it might have become
more difficult for other members to fund their national debts, including
Italy, an economy too large to rescue. Moreover, the Greek default would
have created serious problems for the European financial system, since
large segments of Greek debt were held by northern European banks.
If the other governments had not rescued Greece, they would likely
have had to rescue some of their own banks. As a result of the bailout,
those banks eventually recovered more than €70 billion lent to Greece.
Following the Greek precedent, another bailout of approximately €85
billion was provided to Ireland, in November 2010, and one of €78 billion
to Portugal, in May 2011, followed by a credit facility on which Spain
drew for €41 billion to recapitalize its troubled banks. These funds were
granted only on stringent conditions specifying limits on fiscal deficits
and structural reforms to liberalize various labor or product markets.
At the insistence of the ECB, Ireland was prohibited from writing down
the debt bondholders held in the failing Irish banks. The ostensible
objective was to sustain confidence in European financial markets, but
the effect was again to limit the penalties paid by the private sector for
making risky loans and to transfer the costs of resolving the crisis onto
the public sector.
Many commentators, especially in the northern European media, pre-
sented these bailout programs as acts of unprecedented largesse. Led
by Germany, the north was said to have come to the rescue of the south,
allowing indebted countries to avoid the perils of default. In hindsight,
however, judgments about what happened must be more nuanced. Ger-
many was sustaining a single currency that had been of benefit to its
export sectors and was ensuring that loans made by its own financial
institutions would be repaid. Moreover, the approach taken to these
bailouts had unfortunate economic and political consequences that will
haunt Europe for some years to come.
The negative economic consequences are most evident in the case
of Greece, although there are some parallel features in the treatment
57
of Portugal and Ireland as well. Greece suffered a classic debt crisis as

a result of profligate public spending and inadequate systems for tax
collection. While fiscal cutbacks are necessary in the wake of such a cri-
sis, experiences of other debt crises suggest that countries will emerge
from them only if most of the debt is written off, inflation reduces the
real value of the debt or a revival of economic growth reduces the scale
of the debt relative to GDP.12 In the opening years of the crisis, however,
the European response ruled out each of these alternatives.
The policies of the ECB and global economic circumstances militated
against inflation, and the rescue packages of the EU initially ruled out
writing off the debt. Although Greek debt was written down by a large
amount, equivalent to two-thirds of Greek GDP in March 2012, this initi-
ative came too late to offer adequate relief. Thus, the capacity of Greece
to emerge from the crisis has depended largely on its capacity to grow
economically. But the terms of the bailout programs specified such high
levels of fiscal austerity that economic growth became virtually impos-
sible. These programs required Greece to move from a 15 percent fiscal
deficit to a 3 percent primary surplus within the space of three years,
something few other countries have ever accomplished. Time and time
again, the rosy projections for growth offered by the troika (the Euro-
pean Commission, ECB, and IMF) supervising the bailout conditions
proved illusory. By 2015, Greek GDP remained 25 percent below its level
in 2009. The loans offered to Greece were not sufficient to allow it any
sort of fiscal stimulus: 90 percent of those loans went to pay the interest
and principal due on existing loans. There was no room left to support
aggregate demand in the context of deep cuts to wages and social ben-
efits. As gross domestic product shrank, Greek debt as a proportion of
GDP grew ever larger, further reducing confidence in the economy.
The response of the creditor governments to such concerns has been to
emphasize the value of the structural reforms to liberalize product and
labor markets imposed on Greece as a condition of the bailout. Some of
those reforms are likely to have desirable effects on economic perfor-
mance, but only in the long run. In the short run, structural reforms
undertaken in the context of fiscal austerity often have negative effects.13
12 C . M. Reinhard and K. F. Rogoff, This Time is Different (Princeton: Princeton Univer-

sity Press).
13 B. Eichengreen, “How the Euro Crisis Ends: Not with a Bang but a Whimper,” Journal
of Policy Modeling 37 (2015): 415-22.
58
The suggestion that they could be the basis for a revival of economic
growth was a mirage.
Why then did the creditor countries of northern Europe insist that
structural reforms in the context of fiscal austerity were the best basis
for growth? To some extent, this stance was simply pragmatic politics.
The creditors were already lending Greece sums equivalent to its total
annual GDP. To reduce Greek deficits more slowly in order to revive
the economy, higher levels of lending would have been required, and the
creditor governments worried about an electoral backlash, especially
amidst multiple Länder elections in Germany in 2011. Structural reforms
were seen as a priority because the roots of Greece’s problems were
widely ascribed to the clientelist politics of an overly-regulated economy.
IN THE SHORT RUN, STRUCTURAL

REFORMS UNDERTAKEN IN THE CONTEXT
OF FISCAL AUSTERITY OFTEN HAVE
NEGATIVE EFFECTS
Such views had resonance in northern Europe because they conformed

to the modes of macroeconomic management that worked best there. In
coordinated market economies operating an export-led growth strategy
based on high levels of inter-sectoral wage coordination to hold down
unit labor costs, a restrained macroeconomic stance is desirable because
it reduces the incentives of trade unions and employers to exceed desir-
able wage norms.14 Moreover, Germany had developed an approach to
economic policy-making that foreswore activist government in favor of
the promulgation of rules, in which coordination among well-organized
producer groups was to take place.15 However, as I have noted, the or-
ganization of the southern European economies does not lend itself to
export-led growth strategies of this type. In their case, economic growth
depends more heavily on the expansion of domestic demand.
Accordingly, economic growth is returning to Ireland, whose liberal
market economy, oriented toward foreign direct investment, which is
14 W . Carlin and D. Soskice, “German Economic Performance: Disentangling the Role of

Supply-Side Reforms, Macroeconomic Policy and Coordinated Economy Institutions”,
Socio-Economic Review 7 (2009):), 69-99.
15 P. A. Hall, “Varieties of Capitalism and the Euro Crisis,” West European Politics 37
(2014):), 1223-43.
59
The European Central Bank.
attracted by favorable tax treatment and a skilled, English-speaking

population, has been buoyed by a resurgence in global demand. But
growth remains elusive in southern Europe where multiple years of aus-
terity have taken a toll on productive capacity and levels of investment.
Spain is growing again but at rates not yet high enough to reduce an
unemployment rate close to 25 percent, and growth remains sluggish in
Portugal where the unemployment rate is close to 15 percent. In Greece,
26 percent of the workforce is still unemployed despite a decline in
nominal wages of 25 percent since 2009. The bailout program has left
it floundering in political as well as economic terms. In retrospect, it
looks as if it would have been better if the country had been allowed to
restructure its debt in 2010 and given aid designed to ease its transition
toward a primary surplus rather than focused on paying back lenders.
Such an approach would have imposed a larger share of the adjustment
costs on European financial institutions (and those who invest in them)
but potentially lower levels of suffering on the Greek people.
The response to the Euro crisis also laid bare a series of political
paradoxes consequential for the future of European integration. In the
context of coping with the crisis, the heads of government of the Euro-
zone met together or with other EU leaders an extraordinary fifty-four
times between January 2010 and August 2015. On the one hand, these
high-level meetings reflected unprecedented levels of consultation and
60
cooperation among the member states. On the other, this modus oper-
andi sidelined the Parliament and Commission, institutions that were
supposed to gain influence under the Treaty of Lisbon, in the name of
advancing European democracy. Just when it was supposed to become
more democratic, the EU began to look more technocratic, and the
“troika” seemed to some as if it were operating like an imperial power.
The crisis years have also been marked by the ascendance of Ger-
many to a position of virtual hegemony with the councils of the EU, a
paradoxical result given that France initiated the move to EMU partly
in order to reduce German influence over European economic affairs.
Although it was inevitable that a reunified Germany would gradually
become more willing to assert its national interests because it paid
the largest share of the bailout bills, the Euro crisis rapidly thrust it to
prominence and power, arguably before the German government had
time to reflect carefully about how to balance national and Europe-
an interests. In many respects, Germany is a reluctant hegemon–less
willing to pay the costs of providing public goods for a large number of
states than the U.S. was when it assumed that mantle after World War
II. In the coming years, much will depend on what Germans think their
leadership role in Europe entails.
In another paradoxical result, a crisis that ultimately called forth in-
tensive cooperation among the political elites of the member states has
ended up fostering hostility among the citizenry at large. In the wake
of the crisis, a wave of popular stereotypes poured forth from the me-
dia, rooted on images of “lazy Greeks” and “jackbooted Germans.” As
a result, it is clearer than ever before that social solidarity in Europe
currently stops at national borders. Political leaders bear some respon-
sibility for this state of affairs. The initial response of many northern
European politicians was to treat the crisis not as the existential di-
lemma that it was for Europe, but as a moral issue about whether the
citizens of other countries had been adequately self-disciplined. When
Syriza took office in Greece, it was repaid by accusations that the Ger-
mans were behaving like Nazis. Sentiments such as these have eroded
the sense of transnational solidarity on which electoral support for ef-
fective cooperation within the EU depends.
The most serious issues raised here bear on the EU’s commitment to
democracy, for which it was awarded the Nobel Peace Prize in 2012. The
extensive conditions attached to its bailout agreements, and policed by
the troika, have often been forced on reluctant national governments,
61
notably in Ireland, which was forbidden from imposing a haircut on the

holders of bonds in its failing banks, and in Greece, where the troika dic-
tated highly-detailed sets of spending, tax, and industrial policies. The
reasoning, of course, is that European officials know better than their
national counterparts how to secure the growth necessary to pay back
substantial European loans, and there are precedents in the conditions
imposed by the IMF on debtor countries. But the European Union has
pretensions to democratic governance that the IMF does not, and many
wonder why it could not have negotiated a required level for budget
surpluses in the debtor countries while leaving the decisions about how
to meet those levels to elected governments. This new assertiveness is
gradually altering the relationship between the EU and its constituent
states. The commitment to principles of “subsidiarity,” which it once
advanced in order to guarantee the political autonomy of its members,
has dissolved in the face of an overweening enthusiasm for imposing
“structural reform” on them.
The Future of the Euro and European Integration
In this context, the most pressing issue is whether the single currency
can endure and operate successfully without deeper political integra-
tion. Among the European political elites, there is currently a strong
impetus to centralize economic power in Brussels. Many in the north
want to give the EU more substantial powers over national budgets in
order to avoid a repeat of the fiscal foibles that brought Greece to the
brink of bankruptcy. Politicians from the south are more likely to argue
for an economic government equipped with new sources of funding and
the capacity to promote reflation in Europe. They are supported by
many economists who argue that the single currency will survive only
if the Eurozone moves toward this type of fiscal union with supervisory
powers over national budgets and ideally with a budget of its own to
provide the social insurance benefits that might cushion the member
states facing recession from such shocks.16
The capacities to decide whom to tax and how to allocate the pro-
ceeds, however, are the most important powers of a democratic state.
16 H
. Enderlein et al., “Completing the Euro – A Roadmap towards Fiscal Union in Europe,”
Report of the Tommaso Padoa-Schioppa Group, Notre Europe Study no. 92 (2012).
62
As William Gladstone once said, “Budgets are not merely matters of

arithmetic, but in a thousand ways go to the root of prosperity of in-
dividuals, and relations of classes, and the strength of Kingdoms.” To
pass budgetary powers on to Brussels might be economically efficient,
but it is hardly democratically legitimate. Accordingly, many observers
have argued that a Eurozone authority equipped with such powers must
be democratically governed, and diverse sets of schemes for doing so
have been produced, including proposals to elect the President of the
Commission and to strengthen greatly the powers of the European
Parliament. On this view, deeper fiscal union requires a political union
based on the development of more democratic European institutions.17
IT IS DIFFICULT TO SEE WHERE THE POPULAR

SUPPORT NECESSARY TO ALTER THE EUROPEAN
TREATIES SO AS TO BUILD NEW EUROPEAN
INSTITUTIONS WOULD COME FROM
However, none of these schemes for turning the European Union or

its Eurozone into a supranational democracy are really viable. In the
absence of effective competition among genuinely European political
parties, even the most ambitious schemes for making European insti-
tutions more democratic offer, at best, highly tenuous lines of electoral
accountability, and, in the wake of the Euro crisis, popular support for
passing more powers to Brussels is at a low ebb. Majorities in most
European electorates continue to favor the Euro and membership in
the EU, but enthusiasm for further political integration has declined,
and radical right parties opposed to European integration are on the
rise across Europe.18 In the foreseeable future, it is difficult to see where
the popular support necessary to alter the European treaties so as to
build new European institutions would come from in either southern
or northern Europe.
Moreover, the torturous negotiations accompanying the Euro crisis
have worn away the sense that the single currency is a positive-sum
enterprise offering manifest benefits to all. Because those negotiations
. Habermas, The Crisis of the European Union (Cambridge: Polity, 2012); M. Matthijs and
17 J
M. Blyth, eds., The Future of the Euro (New York: Oxford University Press, 2015).
ew Research Center, European Unity on the Rocks (Washington: Pew Research Center,
18 P
2012).
63
have been dominated by a search for national advantage, as well as

endemic conflict between the ECB and European governments about
which would bear the risks associated with new initiatives, the response
to the Euro crisis has looked like a zero-sum enterprise in which the
risks or costs of new initiatives are borne more heavily by some actors
than others. As a result, it has become more difficult to argue that fur-
ther European integration is an enterprise from which all the member
states will gain.
THE EUROZONE MAY BECOME LOCKED INTO

A DEFLATIONARY MACROECONOMIC STANCE THAT
CONDEMNS SOME OF ITS MEMBER STATES TO SLOW RATES
OF ECONOMIC GROWTH FOR YEARS TO COME
Therefore, the EU finds itself on the horns of a dilemma. Influential

figures are arguing that the single currency will survive only if the Eu-
rozone has an economic government of its own. But, since there seems
no way of making such a government truly democratic, moves in this
direction threaten to replace embryonic democratic institutions with a
new technocracy. Caught between Scylla and Charybdis, the member
states are currently temporizing. With a fiscal compact committing
the member states to budgetary balance and new regulations for the
supervision of national budgets, the European authorities have acquired
unprecedented powers of purview over national budgets, but it remains
unclear whether those powers will ever really be exercised.
Moreover, a fiscal compact that marries a “one-size-fits-all” fiscal policy
to the “one-size-fits-all” monetary policy of the single currency is not a
recipe for economic success. As I have noted, because the political econ-
omies of the member states are organized in different ways, they cannot
all emulate the export-led growth strategies of Germany. Some can pros-
per only via demand-led growth strategies that require more relaxed
fiscal policies. The clear-cut danger is that the Eurozone may become
locked into a deflationary macroeconomic stance that condemns some
of its member states to slow rates of economic growth for years to come.
In this respect, institutional reform will not in itself solve Europe’s
economic problems. The important issue is what sorts of decisions
would emerge from any new set of European institutions, and those
decisions will depend on the relative power and positions of the na-
tional states represented there. A new set of institutions dominated by
64
a German government convinced that the budgets of every member

state should always be balanced (and that trade surpluses reflect virtue
while deficits result from vice) might yield policies no more conducive
to growth than the current ones. Macroeconomic coordination at the
European level will not be successful until those supervising it realize
that there is more than one route to economic success.
Does this mean that, if the member states of the Euro do not move
closer to fiscal and political union, the single currency is doomed to
disintegrate? Not necessarily. The Eurozone does not yet have robust
institutional mechanisms for economic adjustment. But it is arguable
that, with a slightly more-developed institutional exoskeleton built on
recent practice, the single currency may be able to endure.19 Based on
the experience of the Euro crisis, national governments may be more
careful about letting public or private sector debt balloon beyond con-
trol and, if yields in sovereign debt markets become more responsive
to such developments, they will have more incentives to do so. One key
condition for economic success is a robust banking union capable of
identifying and winding down insolvent banks so as to maintain trans-
national financial flows. Although stalled on the issue of cross-national
deposit insurance and equipped with a bank resolution fund that is
currently too small, plans for such a banking union are proceeding.
Another condition underlined during the Euro crisis is the presence of a
European central bank with the capability to act as a lender of last resort
both to banks and to sovereigns in order to deter speculative attacks in
the financial markets. Although it is still formally enjoined from purchas-
ing sovereign debt, the ECB has moved in this direction over recent years
with its program of outright monetary transactions (OMT) backed by
an announced resolve “to do what it takes” to preserve the Euro. Much
depends on whether these practices are accepted as legitimate modes of
operation going forward, and it is conceivable that they might be.
From my perspective, the key issue is whether the single currency
can be sustained even if some member states run endemic deficits on
their current account while others run persistent surpluses, since the
presence of multiple varieties of capitalism inside the Euro makes that
likely. In principle, this need not be a problem: after all, some states in
19 For an argument to this effect, see D. Soskice and D. Hope, “The Eurozone and Politi-
cal Economic Institutions: A Review Article,” in preparation for the Annual Review of
Political Science (2016).
65
the American currency union run endemic deficits or surpluses vis-

à-vis one another. For that to be possible, investors in the states that
acquire funds by running surpluses must be willing to invest some of
those funds in states running deficits. A banking union offering reas-
surance about the solvency of counterparties helps make that possible.
However, the growth prospects of the states running deficits must also
look good enough to justify such investment. Thus, the fate of the Euro
hangs to some extent on future prosperity in southern Europe.
In previous decades, a catch-up process that leads countries at lower
levels of economic development to converge toward the standard of
living of those at higher levels of development has provided incentives
for investment in southern Europe. The Euro crisis has disrupted that
process, and investors will be more wary about the types of asset booms
that appeared over the last ten years. Therefore, much will depend
on the capacity of the states on the southern and eastern boundaries
of Europe to generate growth in new ways and, in particular, to move
towards the production of higher value-added commodities in the con-
text of global markets where the comparative advantages for low-cost
production lie elsewhere. That will require, in turn, that these countries
adjust to the modalities of an emerging knowledge economy.
To date, the record of southern Europe on these fronts is spotty. Ex-
cept in some regions, levels of vocational training and tertiary education
lag behind those of northern Europe, and spending on research and
development is at relatively low levels. But there is opportunity for
improvement to be found here. The larger lesson is that the survival of
the Euro and the prosperity of much of the continent will depend not
simply on the short-term decisions taken about how to survive the cri-
sis, but on the decisions that are made in the countries of southern and
eastern Europe about how to invest in the levels of human capital and
infrastructure that will position them for effective long-term growth.
In this regard, the future of Europe lies as much in the hands of nation-
al governments as it does in extended European cooperation. In many
parts of Europe, the public evinces lower levels of trust in national gov-
ernments than it does in the European Union, and there is correspond-
ing turmoil in national politics.20 Whether political coalitions capable
20 J
. Frieden, “The Crisis, the Public and the Future of European Integration.” Paper pre-
sented to a conference on Transition and Reform: European Economies in the Wake of the
Economic Crisis, Lisbon, May 2015.
66
of constructing effective national growth strategies can emerge from

that turmoil remains to be seen. But, provided Europe gives its member
states adequate room for maneuver, this is not an impossible dream.
RELATED ARTICLES:
The European Central Bank: From Problem to Solution
Contrasts in Europe’s Investment and Productivity Performance
67
R U L ES , CO O P E RATI O N AND TRUST IN THE EU R O A R EA
ALBERTO ALESINA is the Trust amongst citizens is a fundamental feature

Nathaniel Ropes Professor of
which facilitates economic and financial trans-
Political Economy at Harvard
University, where he served as actions. Without it, we need often ineffectual,
Chairman of the Department detailed regulation to prevent uncooperative be-
of Economics. He is a member
of the National Bureau of Eco- havior, cheating, and contract breaching. Without
nomic Research, the Center for trust courts get overwhelmed and public policies
Economic Policy Research, the
Econometric Society and the are unfeasible. In Europe, the recent Greek crisis
American Academy of Arts and has reduced the level of trust amongst Europe-
Sciences. He has been a Co-ed-
itor of the Quarterly Journal of ans, especially along the North - South axis. Thus,
Economics and Associate Editor it will become more difficult to engage in the
of many academic journals. He
has published five books, among necessary regulatory reforms needed in the Euro
them The Future of Europe: area, including a more integrated fiscal policy, a
Reform or Decline and Fighting
Poverty in the US and Europe: A European level unemployment subsidy legisla-
World of Difference. tion and banking union.
68
RULES, COOPERATION
AND TRUST IN THE EURO AREA
The argument
Mutual trust is a key element for the functioning of a polity to run

smoothly. A large body of evidence shows that mutual trust promotes in-
vestment and growth, makes international trade easier, causes financial
markets to work more efficiently, encourages citizens to participate in
socially productive activity, and heightens their involvement in politics,
a fundamental necessity for a working democracy1. Laws are followed
not only because they are enforced but as part of a mutually beneficial
social contract. With mutual trust, cooperation amongst individuals
is easier to sustain. Thus, litigation becomes less prevalent and private
contracts are more widely respected.
LAWS ARE ALSO FOLLOWED BECAUSE

THEY ARE PART OF A SOCIAL CONTRACT
THAT BENEFITS EVERYONE
On the contrary, when individuals do not trust each other, we have

instead heavy involvement of courts in individuals’ lives and invasive
economic rules and regulations. These are poor substitutes; courts may
be overused in a non-trusting and litigious society. In addition, lack of
trust may also imply that courts are also untrustworthy, with the ob-
vious costs associated with uncertainty of the legal system. Regulation
becomes excessive when many contracts or many individual behaviors
require detailed prescriptions in order to prevent cheating and litigation.
In fact, in many cases it is impossible (or very hard) to eliminate cheating
through legislation, and often, regulation involves heavy economic costs
with mediocre achievement. The more complicated regulations are, the
easier it is for corrupt bureaucrats to extract bribes to circumvent them.
1 F
or a classic treatment of the negative effects of lack of trust, see Banfield (1959) and,
more recently, Fukuyama (1995)
69
Thus, regulations meant to enforce law-abiding behavior, such as honesty

in paying taxes, may yield the exact opposite effect.
The available evidence suggests that individuals place more trust in
society’s members who are similar to themselves in terms of culture,
ethnicity, and religion. In particular, mutual trust is stronger within a
country than across citizens of different countries. In addition, citizens
of certain countries are generally trusted more than citizens of other
countries and patterns of mutual trust vary across countries. 2 Thus,
trust across citizens of different countries in Europe travels less well
than amongst citizens of the same country, even in the absence of any
particular problem at the community level.
PEOPLE PLACE MOST TRUST IN THOSE

WHO ARE SIMILAR TO THEM IN TERMS OF CULTURE,
ETHNICITY, AND RELIGION: MUTUAL TRUST IS STRONGER
BETWEEN CITIZENS OF THE SAME COUNTRY
The argument of the present chapter is that the larger and more
long-lasting consequence of the recent Greek crisis in the Euro Area
will be a sharp reduction in the level of trust across citizens of different
countries in Europe. Traditional views or stereotypes about “lazy south-
erners,” “ungenerous Germans,” “rigid northerners,” and “deficit-prone
Mediterraneans” have certainly been reinforced in recent years. In ad-
dition, opinions about the progress of European integration have suf-
fered. The problem is that when individual members of a polity (the
European Union or the Euro Area) do not trust each other, the polity
does not work properly.
The effect of this decline in mutual trust will be to make progress in
fixing the obvious problems in the Euro Area more difficult. Decreasing
trust in the European Union will be an obstacle in many policy areas. In
this chapter, we consider two examples in particular: fiscal policy and
deficit managements, and a European unemployment insurance policy.
In both areas, substantial progress in mutual cooperation would be nec-
essary and useful, but lack of trust (aggravated by the Greek crisis) will
make them more difficult to implement. There will be an even heavier
reliance on fixed rules, which are a second best (very far from the first
best) solution of managing a common fiscal policy in a monetary union.
2 See data from the Word Value Survey and the review article by Alesina and Giuliano (2015)
70
Indeed, it is true that the Greek crisis has forced Euro countries to
adopt new policies regarding bail-outs and common funds for this pur-
pose. My sense, however, is that the more pronounced effect of the
Greek crisis will be a step backwards in the process of building common
economic institutions and a common area that is relatively regulation
free and based on trust.
Trust and rules: what do we know?
Several papers have recently established that heavy regulation is often

a poor substitute for trust; in other words, non-trusting countries tend
to legislate onerous forms of regulation. A case in point is France. In
this country, the level of trust as measured by World Value Survey is
extremely low (given the high level of this country’s GDP per capita),
and regulation in this country is notoriously extensive.
More generally, Aghion et al. (2010) show that in countries where trust
is low, regulation is higher. When trust is low, individuals prefer the
inefficiency of regulation in exchange for partial “protection” against
cheating and non-cooperative behavior. When trust is high, regulation
is less necessary and people demand less of it. These authors provide a
model with two equilibria, one with high trust and low regulation, and
one with low trust and high regulation. Both are self-sustaining equi-
libria. Thus, if the level of trust evolves slowly, this model also explains
why inefficient regulation may last for a long time.
These authors provide evidence on these points by showing that re-
sults hold using three different datasets: the World Values Survey, the
International Social Survey Program, and the Life in Transition Sur-
vey. The World Values Survey poses general questions concerning atti-
tudes towards competition or state intervention, in addition to trust, for
about 80 countries. The International Social Survey Program contains
specific questions on the regulation of wages and prices. The Life in
Transition survey provides evidence on 28 post-Communist countries
in Europe and Central Asia, and it has questions on preferences for
market versus planned economies. Using all these surveys, the authors
find consistent evidence that distrust leads to support for government
regulation. The less people trust each other, the more they want the
government to regulate social interactions. In addition, the authors look
at the change in attitudes from 1990 and 2000 in transition economies
71
relative to OECD countries. Liberalization of entrepreneurial activity

in transition economies starting from a low level of civic trust demands
greater state control of economic activity, thus eroding trust even more.
Francois and Ypersele (2009), using data from the General Social Sur-
vey (a well-respected and widely used survey for the US), found a strong
positive relationship between individual trust and the competitiveness
of the sector in which an individual works. Their idea is that competi-
tion mitigates incentives for free riding by imposing a costly shutdown
on poor-performing firms, making employees more trustworthy.
Aghion, Algan, and Cahuc (2011) provide a model in which higher
minimum wage regulation reduces the benefits to workers of trying to
cooperate with firms. Therefore, more stringent minimum wage regu-
lations crowd out cooperation between firms and workers. In turn, less
cooperative firm-worker relationships increase the demand for mini-
mum wage regulation.
Alesina et al. (2015) show that labor market regulation may be related
to the general sense of trust in society. In countries with a low level of
trust, individuals are willing to move geographically to search for the
available jobs, and matching is efficient in an unregulated competitive
market. In countries were trust is limited to one’s family, individuals
are reluctant to move. In order to prevent monopsonistic power of local
firms, labor market regulation is viewed as a second best option relative
to a completive labor market with geographical mobility. Unemploy-
ment and poor matching are accepted as the cost necessary to avoid
moving from the only trustworthy environment of the family and the
neighborhood. These authors show compelling evidence of these effects
using a variety of sources.
Ample evidence also suggests that trust travels less well across coun-
tries than within a country. Guis, Sapienza, and Zingales (2004), for
example, show how relatively low international trust explains home bias
in financial investments. In addition, mutual trust amongst pairs of coun-
tries is related to their level of international trade in goods and FDI.
Therefore, a fall in the level of trust amongst Europeans may very well
be associated with more demand for regulation and less integration. In-
deed, this may be problematic because the European Union in general has
a tendency for overregulation, as argued by Alesina and Perotti (1998).
The authors, using the example of the (in)famous and fortunately now
forgotten “Lisbon agenda,” show how the European tendency to overregu-
late can lead to almost bizarre extremes. For instance, the Lisbon agenda
72
prescribed a target for the share of children of various age groups who
had to be in preschool institutions subsidized by the taxpayers, among
hundreds of other goals. This is an example of how the lack of trust for
countries to do what is best for them and Europe, combined with an in-
nate tendency for Europeans to resort to state intervention, leads to at
the very least an enormous waste of time, given that the Lisbon agenda
is now forgotten. However in many other cases, as discussed below, the
cost of excessive regulation goes well beyond a waste of time.
EUROPEANS ARE TRAPPED IN A DILEMMA:

THEY ARE RELUCTANT TO MOVE TOWARD
GREATER INTEGRATION, BUT ARE NOT WILLING
TO GIVE UP THE EUROPEAN PROJECT
The crisis in Greece, and more generally the divergence of economic

performance between northern and southern Europe, has put Europeans
into something of a “trap,” as argued by Guis, Sapienza, and Zingales
(2015). The argument by the supporters of European integration was the
so-called Monnet’s doctrine. According to this view, every step, no matter
which, in the direction of more integration would have created incentives
to move further towards more integration in other areas. For instance,
monetary union would have automatically created the incentives to move
towards more fiscal integration and eventually toward political integra-
tion. In other words, the response of European enthusiasts to the critics,
who had argued that a monetary union cannot work without a political
union, was precisely Monnet’s doctrine. Recent events and the accompa-
nying reduction in trust amongst Europeans have put Monnet’s doctrine
on hold. Europeans are in a trap: on one hand, they are reluctant to move
toward more integration (given that they do not trust each other and
disagree on major policy issues such as fiscal policy); on the other hand,
they are not willing to give up the current level of integration. According
to recent surveys, enthusiasm for the European project remains, but the
question is: can a monetary union in this trap survive?
Fiscal rules in a monetary union
When the Euro was introduced, there were two views about how fiscal
policy should have been handled. One view was that since monetary
73
The German Parliament approves the ratification

of the Stability Pact on June 2012.
policy was not in the hands of the national monetary authority, fiscal
policy had to be flexible to allow for anticyclical adjustments, allowing
automatic stabilizers to do their job fully. Within the limits of how much
discretionary fiscal policy can be used as an anticyclical tool (and these
limits are indeed restrictive), the argument is theoretically solid. The
other view was that rules had to be imposed to prevent countries that
generated large deficits from imposing negative externalities (high in-
terest rates, risk of defaults, potential bailouts) on other countries. Giv-
en the relatively low level of trust amongst the members of the Union,
the second approach gained traction.
Here we have another example of regulation instead of trust. Since
Europeans could not trust each other regarding fiscal policy (perhaps
correctly so), they had to introduce regulations, like the Stability and
Growth Pact, which was a sort of elaborately balanced budget rule with
escape clauses.
Balanced budget rules are suboptimal because they interfere with an-
ticyclical movements of deficits. They are, however, a second best solu-
tion when political disruptions generate large and persistent deficits.3
3 See Alesina and Passalacqua (2015) for a review of the literature on political influences
on budget deficits and a discussion of pros and cons of balanced budget rules. On the
latter point, with special reference to Europe, see also Wyplosz (2014)
74
Clearly, Europeans thought that some countries could not be trusted

and that a regulation on the deficit was necessary.
However, as is well known, this regulatory policy did not work. Rules
were not followed. In fact, Germany was the first country to break the
stability and growth path in the early 2000s, but many other countries
followed. After a round of deficit reduction policies in line with the
criteria for joining the union, after year 2000, countries “relaxed”. De-
spite the reasonably high level of growth in Europe at that time, deficits
generally increased.
The reasons why Germany violated the rules can be debated. It could
have been a way of helping the labor market and liberalization by Chan-
cellor Kohl, or the aftershock of the reunification, or simply a slippage of
the traditional rigorous German stance on the deficit. Be that as it may,
Germany violated the SGP. This was the beginning of a host of other
violations, including the extraordinary large one by Greece, a country
that also cheated on its statistics to hide the mounting deficits.
This was the first blow to an already relative low level of intra-coun-
try trust within the Euro Area. The Greek crisis, which lasted several
years (“Is it over?” one may ask), reduced mutual trust even further.
The effect on the Greek-German relationship was particularly extreme.
Fouka and Voth (2015) show that the sale of German cars dropped in
Greece (after controlling for the effect of the recession and sale of other
countries’ cars), especially in places in Greece that had suffered more
from Nazi violence. This is a rather worrisome result if it implies that
ancient hatreds are revived by recent events.
Even the handling of the so-called austerity in Europe can be related
to low (and declining) levels of trust. A vast body of recent research
(see Alesina, Favero and Giavazzi (2015), Alesina et al. (2015), and the
references cited therein) has established the following results regarding
deficit reduction policies. First, and most importantly, spending cuts are
much less costly than tax increases in terms of output losses. Second,
well - designed fiscal adjustment plans, in multi-year periods by various
pro-growth reforms (labor market liberalizations, etc.), may reduce the
costs of fiscal adjustment to zero and in some case be expansionary.
European austerity did not follow these principles. Because of the fear
of contagion from Greece and the lack of trust about the intention of
countries to follow adequate policies, European institutions enforced
austerity of any type at all costs. For instance, it would have been wiser
to adopt spending cuts but avoid tax increases even at the cost of slowing
75
down the pace of fiscal adjustments. When Europe could not emerge
quickly from a recession, allowing tax cuts would have been desirable.
These policies would have implied “trust” that countries were not simply
on a continuing unsustainable path of fiscal deficits, but instead were
designing appropriate multiyear adjustment policies. However, because
of the Greek contagion (which also implied lack of market trust vis-à-
vis other indebted countries) and the generalized mistrust, European
institutions demanded any kind of deficit reduction policies immediately.
The collapse of trust in the markets was also a factor. European
institutions mishandled the Greek crisis before and during the finan-
cial crisis. The uncertainty about whether states would be bailed out
or not generated market instability. Before the crisis, markets treated
southern European debt, including Greek debt, basically as German
debt, with no risk premium. That was an incentive for some countries
to borrow since it was so cheap. When the Greek crisis exploded, the
market was unsure for a while about what policymakers would do, and
the crisis spread.
In an ideal world, countries could be trusted to implement well - de-
signed fiscal adjustment polices without exporting contagion to the
Euro Area. Was it reasonable for northern Europe not to trust the sin-
cere desire of southern Europe in general (not only Greece) to adopt
responsible fiscal policies? We will never know for sure, but my guess
is that the collapse of trust beyond Greece surpassed what might have
been reasonable. Was it reasonable for (some) southern European pol-
iticians to blame the northerners for the delays in their policy reforms
and their inability to establish credibility with the markets? In most
cases, the answer is no.
The result of these events is that the Euro Area is now moving even
more in the direction of rules to tighten budget controls. Currently, Eu-
ropean institutions get involved in discussions about the first decimal
of deficit projections of this or that country. As expected, tightening
the rules of the failed compact seems to be the answer to the collapse
in trust.
Unemployment insurance in a monetary union
In the United States, the federal government finances the unemploy-

ment subsidy program. This means than when a state in the union
76
suffers disproportionally from a recession, other states indirectly re-

distribute to the badly hit states through the federal unemployment
insurance program. In some cases, these redistributions are quite large
when recessions hit different states in very different ways, as the Great
Recession did.
In Europe, unemployment subsidies are national programs. There
has been some discussion about making them supranational. Recently,
the French authorities proposed a plan to introduce unemployment
subsidies financed at the European level with funds provided in some
proportion by national governments.
WITH SUPRANATIONAL UNEMPLOYMENT

INSURANCE, THE INCENTIVES ARE LESS FOR
A NATIONAL GOVERNMENT TO ENGAGE IN
POLICIES THAT RESCUE THE UNEMPLOYED
This is a good idea in theory. Monetary policy cannot target the need
of states in deeper recessions than others, since this is common for the
Euro Area, and the European Central Bank can only target “average”
European macroeconomic trends, for instance, inflation and, indirect-
ly, income growth. As we have discussed above, even fiscal policy is
constrained by the fiscal compact. In addition, labor migration within
Europe is much lower than in the US, and different levels of unemploy-
ment in different European countries generated much lower response
in terms of labor mobility than in the US.
I predict that this proposal will not be implemented anytime soon. The
reason is, once again, the lack of mutual trust. With supranationalunem-
ployment insurance, the incentives are less for a national government
to engage in policies that rescue the unemployed. In Europe, with its
highly regulated labor market, these policies would involve some sort
of liberalization, with the details differing from country to country. As
is well known, this issue is politically quite challenging because of the
stance of local unions. If unemployment subsidies were financed by a
European fund, then the political incentives to engage in the necessary
struggle to implement labor market reforms would decline, and the
costs of this would be transferred to the supranational level.
On the other hand, one may argue, labor market reforms that could
imply some temporary unemployment in the short run, compensated by
long-run gains, would be made easier by European level unemployment
77
subsidies. This force, however, would be at work if European partners

would trust each other about the long-term commitment to labor re-
forms. That is, European institutions should view unemployment in
this or that country as a temporary cost to pay in a period of reforms
(if those cost existed), rather than a permanent attempt of that country
to receive funding from Europe. Lacking this trust, I am afraid the first
type of incentive and political argument would prevail.
LABOR MARKET REFORMS

THAT COULD IMPLY SOME TEMPORARY
UNEMPLOYMENT IN THE SHORT RUN, WOULD
BE COMPENSATED BY LONG RUN GAINS
If, in the future, such a system of unemployment subsidies financed at

the Euro level became acceptable, it most likely would be accompanied
by a set of complicated rules to avoid the behavior described above of
simply accepting national unemployment subsidized by Europe (or at
least not do enough to reduce it). I envision a Euro Area agreement
accompanied by a complete set of prescriptions about the level of un-
employment, cyclical versus structural (and who decides?); what to
do about black economy employment; and under what circumstances
funds would be available and potentially subsidized supranationally, etc.
Whether such a set of rules would make the system work or actually be
counterproductive and confusing would remain to be seen.
Conclusions
Citizens of a common monetary area need a minimum level of trust

to make their union work. The European Monetary Union joins sev-
eral countries with different attitudes, cultures, and histories. Critics
of the euro project (for instance Martin Feldstein) suggested that the
monetary union would instead add to the potential animosity amongst
members, and he was proven right. The level of animosity amongst
European partners is at a high point.
At this stage, I see two possibilities. The pessimistic view is that Eu-
ropeans are correct in not trusting each other. Southern Europeans
are indeed unable to keep their budgets in order and/or to be more
efficient in managing their economies. Northern Europeans are indeed
78
unwilling to do any more in terms of redistribution to help southerners

and continue to demand unreasonable conditions. As a result, the Euro
Area might survive only with a set of stringent and inefficient rules.
The optimistic view is that the Greek crisis has taught a positive les-
son to all concerned. Can trust increase in a group lacking it? This
is indeed a tough question that relates more generally to the issue of
how quickly certain cultural traits evolve.4 Certain cultural attitudes
are quite persistent; however, recent evidence by Giavazzi, Petkov, and
Schiantarelli (2014) suggests that perhaps people can learn to trust
each other relatively quickly. Their evidence is based on immigrants to
the US and thus refers to individuals in contact with each other. This
suggests that education and a closer interaction between Europeans
may work in the right direction. For instance, Erasmus programs and
other educational exchanges may help.
Geographical mobility within Euro Area countries is, in fact, notori-
ously low compared to the US, probably lower than what it is normally
believed to be a condition for labor market adjustments in a monetary
union. There is, however, a more subtle reason why more geographical
mobility may help. In addition to clearing labor markets, it may also
help develop more trusting Europeans.
What is certain is that without a minimum level of trust, a monetary
union does not function well.
RELATED ARTICLES:
The Euro Crisis and the Future of European Integration
The Impact of European Integration on National Democracies:

Democracy at Increasing Risk in the Eurozone Crisis
The Welfare State in Europe
4 For an overview of this and related issues about persistence of cultural traits, see Ales-
ina and Giuliano (2015)
79
T H E E U R OP EAN CENTRAL BANK : FRO M PR OB LEM TO SOLU TION
BARRY EICHENGREEN The ECB has moved from part of the problem
is the George C. Pardee and to part of the solution. At first, it only focused
Helen N. Pardee Professor of
Economics and Professor of on inflation, it neglected risks to financial
Political Science at the Univer- stability, it opposed debt restructuring and it
sity of California. He was Senior
Policy Advisor at the IMF, and hesitated to embark on quantitative easing
he is a fellow of the American even when the spectre of deflation loomed.
Academy of Arts and Sciences
and one of Foreign Policy Maga- Now it recognises its lender and liquidity
zine's 100 Leading Global Think- provider responsibilities, it has shown itself
ers in 2011. His two most recent
books, Exorbitant Privilege: The capable of pursuing unconventional policies
Rise and Fall of the Dollar and the in unusual cirucmstances, it has softened its
Future of the International Mone-
tary System and Hall of Mirrors: doctrinal opposition to debt restructuring and
The Great Depression, the Great it has assumed additional responsibilities for
Recession, and the Uses and Mis-
uses of History, were listed for
banking and financial supervision.
the Financial Times awards.
80
THE EUROPEAN CENTRAL BANK:

FROM PROBLEM TO SOLUTION
The European Central Bank is an evolving institution. Since 2007, it has

evolved from being part of the problem to being part of the solution.
Prior to the outbreak of the global financial crisis, which we can conven-
iently date to August 9, 2007, when BNP Paribus suspended three of its
funds due to problems with their investments in U.S. subprime-linked
securities, the ECB focused narrowly on its price stability mandate
to the exclusion of financial stability-related goals. After then taking
a series of exceptional steps in 2007 and 2008, in response to prob-
lems in Europe’s banks and financial markets, in 2009, it prematurely
concluded that its work was done and contemplated phasing out its
unconventional policies. In 2010 and 2011, it opposed all talk of a Greek
THE ECB OPPOSED ALL TALK OF DEBT RES-

TRUCTURING, IT RAISED INTEREST RATES TWICE AND
REFUSED TO MOVE TO QUANTITATIVE EASING
debt restructuring, instead saddling the Greek sovereign with additional

debt that went to pay off its French and German bank creditors. In 2011,
still fixated on inflation, it raised interest rates twice, tightening the
screws on the crisis countries. Even when it became clear that the real
and pressing danger was deflation, the central bank refused to move to
quantitative easing a l’Amérique.
Yet, in the course of the crisis, the ECB learned from experience. It
embarked on a series of increasingly ambitious operations designed
to address liquidity problems in Europe’s banks and financial markets.
In 2012, Mario Draghi issued his famous “do whatever it takes” ultima-
tum, signalling his and the institution’s commitment to take whatever
measures were needed to ensure the cohesion of the euro area. The
crisis having highlighted the folly of monetary union without banking
union, the central bank was designated Single Supervisor of system-
ically important commercial banks in 2013. And at the beginning of
81
2015, in response to the threat of imminent deflation, the ECB “crossed

the Rubicon”, to use the now standard phraseology, initiating quanti-
tative easing.
This characterization of the ECB as evolving from part of the prob-
lem to part of the solution, while containing a kernel of truth, is of
course a vast oversimplification. The ECB did not entirely abdicate its
responsibility for financial stability before 2007, or for the cohesion of
the Eurozone before 2012. After 2011, it did not move quickly enough
THE CENTRAL BANK WAS CRITISIZED IN

ITS EARLY YEARS BECAUSE OF ITS TENDENCY TO
OVERSHOOT ITS 2% INFLATION TARGET
in abandoning its opposition to a deeper Greek debt restructuring and

in distancing itself from matters tangential to central bank policy, in
which it became embroiled as a result of its participation in the Troika
of institutions negotiating with the Greek government. Quantitative
easing in 2015 was long overdue.
Still, there is ample evidence that the ECB is a learning institution. A
review of what it learned in the eight years ending in 2015 may therefore
provide some guidance as to what it will learn, and what kind of central
bank the euro area will possess, going forward.
*****
The ECB was created to serve as a bulwark against inflation, re-

flecting German fears that inflation is always right around the corner.
The Treaty on the Functioning of the European Union (Article 127,
Parts 1 and 2) defines the primary objective of the ECB and the na-
tional central banks that together comprise the European System of
Central Banks as “to maintain price stability.” The article goes on to
mention the central bank’s obligation to support the general economic
policies of the union, act in accordance with the principle of an open
economy with free competition, and promote the smooth operation
of the payment system. “Support[ing] [...] general economic policies”
and “act[ing] in accordance with the principle of an open economy”
can encompass many sins, but there is no question that price stability
was always the institution’s paramount goal. Enshrinement of such in
82
the relevant European treaties was Germany’s price for agreeing to

move to monetary union.
Much criticism of the central bank in its early years centered on its
tendency to overshoot its 2 percent inflation target and on the danger
that currency depreciation augured even higher inflation (see for exam-
ple Galí 2002). Successive ECB presidents, Wim Duisenberg, through
October 2003, and Jean-Claude Trichet, thereafter, hence sought to
show that they were committed to the institution’s inflation target—to
demonstrate, as I put it in Eichengreen (2015), that they were as Teu-
tonic inflation fighters as any German.
The introductory statements of the president and vice president at
the press conferences following the governing council’s periodic mon-
etary policy decisions contain many more references to inflation and
price stability than to financial imbalances and financial instability.1 The
ECB was notably silent in this period about the financial imbalances
building up as a result of massive capital flows from Northern to South-
ern Europe and the risks of investments by French and German banks
in the bonds of Southern European countries and U.S. mortgage-linked
securities. Adjustments in the central bank’s policy rates were geared
toward moving actual and expected rates of inflation toward target
rates. Little attention was paid to differences in credit conditions in
Northern and Southern Europe and what these might imply for finan-
cial stability (Micossi 2015).
The situation changed abruptly, in 2007, with BNP Paribas’ fateful
August 9th announcement. The resulting scramble for liquidity created
serious problems for European banks and borrowers, especially those
thought to have invested in the same securities held by the three BNP
Paribas funds. The ECB responded with a “full allotment at policy rate”
initiative, under which it committed to providing as much liquidity as
the banks might require, in the form of overnight loans, at prevailing
policy rates. The ECB dispersed as much as €95 billion through this
channel on the Thursday in question (Trichet 2011).
This response was ambitious even by the standards of the Federal
Reserve up to this point in time, though its import was minimized by
Trichet, who characterized it as a “fine-tuning operation.” But the ep-
isode suggests that the ECB, while still unaware of solvency problems
1 These statements are catalogued on the ECB website at https://www.ecb.europa.eu/

press/pressconf/2015/html/index.en.html.press/pressconf/2015/html/index.en.html.
83
in Europe’s banking system, was not entirely neglectful of its respon-

sibility for the operation of the payments system and, relatedly, of the
interbank market. Not that this indicated any diminished preoccupation
with price stability: the ECB raised its policy rate by 25 basis points in
July 2008—not exactly propitious timing—in order to “counteract the
increasing upside risks to stability over the medium term,” in Trichet’s
words in his introductory statement following the July 3rd governing
board meeting.2 Trichet specifically cited the contribution of food and
fuel to the inflation overshoot, indicating an inability or unwillingness
to distinguish headline from core inflation.3 He further cited the rela-
tively rapid growth of money and credit aggregates in an obligatory
bow toward German monetarism, thereby failing to distinguish credit
growth as a reflection of a healthy supply and demand for funds from
credit growth as a reflection of an exceptional demand for liquidity. He
emphasized, naïvely in hindsight, the absence of major imbalances in
the European economy.
It is unsurprising, then, that the ECB’s balance sheet showed little
growth in the nine months leading up to the crisis sparked by the failure
of the U.S. investment bank Lehman Bros., although the central bank
did shift its repurchase (repo) operations toward longer-term securities,
providing banks with liquidity longer than overnight.4 In response to
the post-Lehman liquidity squeeze, the ECB again ramped up its policy
of fixed rate tenders with full allotment. This was an acknowledgement
that the liquidity problem was now affecting more than just the inter-
bank overnight market.
In addition, the ECB provided long-term refinancing operations
(LTRO), also at a fixed rate and on a full-allotment basis, as always (up
to this point) against good collateral, for up to three months.5 The collat-
eral requirements in question were eased a number of times, while the
2
https://www.ecb.europa.eu/press/pressconf/2008/html/is080703.en.html.
3 This is something I talk about more in Eichengreen (2015).
4 Nor, it should be noted, did the Fed’s balance sheet grow dramatically in this period.
5 In addition, the ECB provided U.S. dollar liquidity to European banks that had funded
themselves in dollars, in September providing overnight liquidity and then starting in
October conducting regular auctions of dollar liquidity and offering as much as $100
billion for as long as 84 days, using its swap lines with the Federal Reserve. Again, the
length of the commitment was an indication of the realization that more than overnight
markets were now being affected. In addition, in 2010 liquidity swap arrangements with
foreign central banks were reactivated, and the ECB again provided US dollar liquidity
at fixed rates with full allotment against eligible collateral. See below.
84
maturity of LTROs was extended. The ECB introduced operations with

a maturity of 6 months and then 1 year. In December 2011, and February
2012, it conducted two very long-term refinancing operations (VLTROs)
with a maturity of 3 years and a cumulative magnitude of more than
€1 trillion (although part of these operations only substituted previous
borrowing at shorter maturities). The credit threshold for eligibility of
collateral was lowered from A- to BBB- for marketable assets (with the
exception of asset-backed securities) and non-marketable assets (which
were subject to an additional haircut). 80 percent of this borrowing was
by banks in the Eurozone’s five troubled economies: Spain, Portugal,
Italy, Greece, and Ireland.
FOLLOWING LEHMAN’S BANKRUPTCY, THE ECB

ACKNOWLEDGED THAT THE LIQUIDITY PROBLEM
WAS NOW AFFECTING MORE THAN JUST
THE INTERBANK OVERNIGHT MARKET
The consequence was a lengthening of the maturity of assets on the

ECB’s balance sheet and some de facto increase in the credit risk of
that portfolio. This now was liquidity provision big time, although it still
failed to reflect an awareness of deeper solvency problems that mere
liquidity-related operations could not help address.
LTRO and VLTRO were designed to address problems in the banks,
understandably given that the interbank market was first to be hit by
the BNP Paribas event, and appropriately given bank dominance of
Europe’s financial system. Following Lehman’s bankruptcy, however,
liquidity problems spread from the banks to securities markets. Buy-
ing private sector liabilities to address liquidity problems in specific
segments of the securities market—engaging in what U.S. Federal Re-
serve Chair Bernanke referred to as “credit easing” to distinguish it,
not always successfully, from “quantitative easing”—would be a signif-
icant departure for the ECB. It would also be controversial, given the
tendency for credit easing and quantitative easing to overlap.
Thus, the ECB proceeded incrementally, starting with purchases of
covered bonds (securities issued by the banks and packaged in such
a way as to limit credit risk). Covered bonds, in the words of Trichet,
“are different in nature from the various asset-backed securities that
became so popular before turning sour with the financial crisis. Im-
portantly, covered bonds do not involve the transfer of the credit risk
85
implied by underlying assets from the issuer to the investor.” Of course,

if the credit risk of covered bonds was so limited, one might ask why
there was such a limited appetite for them from private purchasers. Be
this as it may, covered bond purchases and related operations appear
to have succeeded in reducing interest rate spreads in money markets
to pre-crisis levels and stimulating a higher level of activity in repo
markets. On this basis, the ECB concluded that its work was done and
turned its attention to phasing out its nonstandard operations.
THE COVERED BOND PURCHASES ESTABLISHED

THAT THE CENTRAL BANK COULD PURCHASE PRIVATE-SECTOR
LIABILITIES WITHOUT DESTABILIZING THE MONETARY
AGGREGATES OR PRICE EXPECTATIONS
The central bank’s covered bond purchases at least established that

it could purchase private-sector liabilities without destabilizing the
monetary aggregates or price expectations. Purchases of government
securities, which came perilously close to direct monetary financing
of governments, were another matter, or so it was thought. But such
purchases became relevant, indeed imperative, with the explosion of
sovereign spreads following the eruption of the Greek crisis in late 2009
and early 2010. All of a sudden, it was clear, not least to the ECB, that
Europe was engulfed not just in a liquidity crisis but in a full-fledged
banking and sovereign debt crisis and that, contrary to prior expecta-
tions, the central bank still had plenty to do.
The ECB addressed concerns about direct money financing of budget
deficits by limiting its purchases of sovereign bonds to the secondary
market, under the terms of the Security Market Programme (SMP)
announced in May 2010. It justified the SMP as necessary for the
smooth transmission of monetary policy, given that very large sovereign
spreads, reflecting concerns over sovereign debt sustainability, were
preventing its policy rates from having much impact on the market
rates faced by private borrowers. To address concerns about inflation,
the ECB committed to sterilizing the impact of the SMP on money
aggregates, auctioning fixed term deposits as a way of sequestering
commensurate amounts of credit.6
6 A
nd to avoid compounding problems in secondary markets, it announced that it would
hold the bonds purchased to maturity.
86
The ex-president of the ECB, Jean-Claude Trichet.
The SMP appears to have had some positive impact on securities mar-
kets, reducing the magnitude and volatility of sovereign spreads in the
short run. But the program was limited in size: the ECB ended up pur-
chasing just €220 billion of mainly Greek, Irish, Portuguese, Italian, and
Spanish government bonds, a drop in the bucket by subsequent stand-
ards. And, in and of itself, the SMP did nothing to reassure investors
about the sustainability of the public finances of the crisis countries or to
significantly brighten the prospects for economic growth and price sta-
bility, where deflation now constituted the primary threat to the latter.
By mid-2011, the explosive widening of spreads was back. The ECB
resorted to its now tried and true instruments, “actively” implementing
the SMP, conducting a second round of covered bond purchases, provid-
ing dollar liquidity through its Fed swap lines, and cutting interest rates
toward zero. At the end of the year, it extended the duration of credit
provided to financial institutions to up to 36 months. These operations
continued into 2012. None of them sufficed, however, to contain the
mounting threat to the cohesion of the monetary union.
*****
That threat centered on the Greek crisis and on whether Greece’s fu-
ture lay within the Eurozone—a question whose implications for other
87
crisis countries like Spain, Portugal, Ireland, and Italy was too obvious
to state. The ECB had been involved in managing the Greek crisis as
one of the institutions, together with the European Commission and
the IMF, negotiating with the Greek government over an emergency
loan and adjustment program. A number of justifications can and have
been offered for its involvement, none of which is compelling. The ECB’s
official reply to the European Parliament on this question, in 2010, noted
that negotiations with Greece might have “implications for monetary
policy.” But many things have implications for monetary policy, and the
central bank is not involved, automatically, in all of them.7
It is argued that the ECB had a pecuniary interest in the Greek gov-
ernment’s finances, given Greek government bonds acquired through
the SMP and the TARGET2 system. But central banks should be mo-
tivated by larger concerns than their profits and losses as reflected in
their balance-sheet statements.8 It can be argued that only the ECB had
the institutional competence to effectively represent Europe-wide inter-
ests in the Greek negotiations—for example, because other institutions
lacked expertise on the operation of the Greek banking and financial
system. This seems farfetched. But if it is true that other institutions,
like the Commission, lacked an adequate brigade of competent financial
technicians, then this was simply an argument that it should acquire
them and, if necessary, that the ECB provide them on secondment to
the proper political authorities. It is argued that since the ECB would
be keeping the Greek banks on life support with Emergency Liquidity
Assistance (ELA), the central bank had a right to be in the room when
the important policy decisions were taken. But this is a rationale for
keeping it informed of those decisions, not for giving it a hand in them.
Finally, it is argued that the decision of whether to eject Greece from
the Eurozone ultimately lay with the ECB, which could bring this about
by withholding ELA. But there is a strong counterargument that the
decision of whether Greece should be in or out properly lay with elected
political officials, not with technocratic central bankers with a narrow
monetary mandate.
Indeed, it can be argued that the ECB’s participation in the Troika
constituted a conflict of interest. It put an ostensibly apolitical institu-
tion in the position of negotiating fundamentally political conditions. Its
7 See ECB (2010).

8 For more on the nature and limitations of the argument see Reis (2015).
88
involvement in the Troika expanded the breadth of the central bank’s

responsibilities beyond predominantly monetary and financial matters,
what with the institutions and the Greek government negotiating over
privatization, pension reform, the minimum wage, and other socially
delicate matters. The broader the responsibilities of the central bank
consequently became and the further it stretched its mandate, the hard-
er it was to hold it accountable for its actions and the greater, therefore,
became the threats to its independence, something whose maintenance
is essential on narrow monetary policy grounds.
Finally, as the ECB acquired an interest, as a principal in the Troi-
ka, in seeing program countries carry out structural reform, economic
growth became the enemy insofar as growth reduces the pressure for
governments to take painful measures. The incentive to apply pressure
for reform thus came into conflict with the central bank’s core respon-
sibility of promoting price stability and economic growth.
Such conflicts manifested themselves in the opposition of the ECB, in
the person of its then president, Trichet, to a Greek debt restructuring.
To many observers, the argument for a restructuring was compelling
as early as May 2010.9 The Troika’s projections of the Greek debt/GDP
ratio were so incredible as to significantly damage the credibility of the
institutions. Yet the ECB continued to oppose all talk of restructuring
well into 2011. In April, Trichet wrote a letter to Greek Prime Minister
George Papandreou, warning of “grave risks that the Greek govern-
ment would take if it were to pursue at this juncture a rescheduling of
its debt, even on a voluntary basis. […] Pursuing such a strategy would
put Greece’s refinancing in euro [meaning access to ECB credit] at
major risk.”10 At a meeting of European finance ministers on May 16th
and 17th, 2011, Trichet reportedly threatened to retaliate against any
restructuring by refusing to supply the Greek banking system with
further liquidity, before then storming out of the meeting.11
It could be that Trichet was motivated by fears of what a restructuring
would do to the European banking system—in which case his fears were
unfounded, since the banking system survived when a restructuring of
private debt finally occurred in 2012. It could be that he was motivat-
ed by fears of what a restructuring would imply for the ECB’s balance
9 There is ample documentation of the point in Blustein (2015).

10 Quoted in Xafa (2014), p.15.
11 This according to a report in FT Deutschland.
89
sheet—in which case his fears were inappropriate, since, to repeat, bal-
ance-sheet considerations should not be what motivate a central bank.
In the event, restructuring in 2012 focused on privately-held debt,
exempting the ECB from a haircut. In talk of a second restructuring
in 2015, this time of officially-held debt, there were hints that the ECB
might be permitted to transfer its Greek bond portfolio to the European
Stability Mechanism in return for ESM obligations. If so, this would re-
move the constraint, although not the fact that the ECB had no business
opposing a much needed debt restructuring for years.
*****
The last chapter of the tale opens with the succession of Trichet by
Draghi, in November 2011, and the rapid evolution in ECB policy that
followed. How much of a role was played by presidential leadership and
personality will be for future historians to judge; their evaluation will
have to wait on the availability of the relevant archives and memoirs.
But the speed and extent of the evolution are striking.
FOLLOWING THE SUCCESSION

OF TRICHET BY DRAGHI, IN NOVEMBER 2011,
THE ECB BEGAN EFFORTS FOR REFORMS
The changes in question began even prior to the formal handover

from Trichet to Draghi. In October 2011, just days before the transition,
the ECB moderated its earlier unconditional opposition to a Greek re-
structuring, subject still to the proviso that officially-held debt (read
“ECB-held debt”) would be exempt from haircuts.12 Although it was
anticipated that Greece’s bonds would be downgraded to a rating of
“selective default,” the ECB agreed to continue to provide liquidity to
the Greek banking system through its ELA window.
One can’t help but think that the timing of the shift was related to the
imminent retirement of the central bank’s second president. The ECB’s
greater flexibility on the option of restructuring did not resolve the
Greek crisis or take the spectre of Grexit off the table—far from it—but
it was a constructive step. By demonstrating that restructuring, done
12 For details see again Xafa (2014).
90
right, would not destabilize the European financial system, it made it

possible to contemplate further use of the instrument.
Draghi, on assuming the presidency, also inherited the problem that
the Security Market Programme had only a short-term palliative effect
on bond spreads. He inherited the Greek debt crisis, notwithstand-
ing the first restructuring in March 2012. This continued to raise the
spectre of not just Grexit but also the possibility that if Greece went
through the door, other troubled euro area countries would be tempted
or forced to follow. Bond spreads widened sharply as a result of what
ECB officials, in antiseptic central-bank argot, referred to as “rede-
nomination risk.”
As Benoit Couré, member of the Executive Board, later put in it a speech:
For example, the spreads of Spanish and Italian ten-year government
bonds relative to Germany had increased by 250 basis points and 200 ba-
sis points respectively in July 2012 compared to one year before. In neither
one of the two countries, fundamentals had changed so spectacularly to
justify such drastic re-pricing of sovereign risk. The Italian government
had taken measures which would lead to a reduction in the deficit below
the reference value of 3%. The Spanish government had just embarked
on a series of reforms re-dressing long-standing problems in the labour
market and in the banking sector (Couré 2014).
And yet, the possibility of an investor run on public debt markets,

of the sort modeled by Cole and Kehoe (1998), threatened to produce
self-fulfilling results and fracture the Eurosystem.
The intensity of the pressure, which mounted over the summer of
2012, led Draghi to issue his dramatic “do whatever it takes” pledge on
July 26th. This was the sort of unconditional commitment from which
the Trichet ECB had shied away, suggesting that the central bank now
had more muscular leadership. The impact on bond spreads was imme-
diate. Spanish and Italian bond yields both fell to sharply lower levels,
where they stayed.
Still, the policy was subject to conditions. The popular headline, in
fact, came with an important preface; the full sentence read “Within our
mandate, the ECB is ready to do whatever it takes to preserve the euro”
[emphasis added].13 Mr. Draghi’s open-ended pledge was not received
happily in Germany. Bundesbank President Jens Weidmann made no
secret of his reservations about the commitment to do whatever it
13 <https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html>.
91
The president of Deutsche Bundesbank, Jens Weidmann,

in a press conference.
takes, especially insofar as “whatever” might include large-scale bond

purchases. The within-our-mandate clause was designed to reassure
Weidmann and other like-minded skeptics.
Second, when the ECB moved in August to implement Draghi’s pledge
with a program of Outright Monetary Transactions (OMTs)—outright
purchases of the bonds of the affected countries—it made activation
conditional on the country first negotiating a program with the Euro-
pean Stability Mechanism (ESM).14 This approach reflected the ECB’s
prior experience with buying the bonds of troubled Southern European
countries. In August 2011, Italian Prime Minister Silvio Berlusconi had
agreed to the terms of a letter sent to him by Trichet and Draghi (the
latter then still governor of the Bank of Italy but, as such, a member of
the ECB governing council), setting down the reforms that the Italian
government would have to pursue in return for ECB support. But when
14 A
s with Draghi’s July 2012 pledge, subsequent justifications for OMTs ritually invoked
the ECB’s mandate. To quote Couré (2014), “Why were these sovereign bond market
developments relevant from an ECB perspective? In any economy, the government
bond market plays a prominent role in the transmission of monetary policy and ulti-
mately matters for the effective achievement of the central bank’s objective—in our
case, price stability.” While OMT was announced in August, it became operational only
in September, potential operations having to wait on the existence of the ESM, which
was formally established only toward the end of the latter month.
92
the ECB began buying Italian government bonds under the SMP, Berlus-
coni reneged on his commitment to painful reforms. Requiring a country
to negotiate either direct budgetary support or a precautionary line of
credit with the ESM and to sign a memorandum of understanding was
a way of limiting the risk, or raising the cost, of this kind of backsliding.
It was also a way of getting the ECB out of the business of negotiating
fiscal and structural conditionality, something more appropriately left
to politicians and to technocrats like those of the Commission and the
IMF for whom this is an explicit part of their charge.
THE FACT THAT THE ECB WAS NOW READY

TO ACT AS LIQUIDITY PROVIDER OF LAST RESORT
TOOK THE POSSIBILITY OF MULTIPLE EQUILIBRIA,
OR SELF-FULFILLING CRISES, OFF THE TABLE
The most striking aspect of OMT was that it didn’t actually have
to be activated to produce the desired result. Yields on the bonds of
troubled European sovereigns other than Greece, obviously a special
case, remained at sharply lower levels not just through the end of 2012,
but through 2013, and into 2014. Efforts at structural reform and fiscal
consolidation in these countries continued. But, echoing the quotation
from Coeuré above, there were no dramatic changes in the stance of
policy in the countries in question.15 Reform efforts there had been, and
reform efforts there continued to be. But the fact that the ECB was now
ready to act as liquidity provider of last resort took the possibility of
multiple equilibria, or self-fulfilling crises, off the table. The sharp shift
in conditions in Europe’s sovereign debt markets thus testifies to the
importance of the ECB’s evolution from simple inflation targeter and
faithful follower of a monetary rule to true lender of last resort.16
While OMT removed the specter of a self-fulfilling debt run, it did
nothing to address the danger of deflation that developed in the Euro-
zone and throughout the advanced-economy world, starting in 2012. In
15 T
here were changes in national political leadership, to be sure, but again it can be
questioned whether these sufficed to produce the dramatic turnaround in sovereign
spreads.
16 The point had been anticipated long before by Folkerts-Landau and Garber (1992),
which only serves to underscore how long it took for the relevant evolution to take
place. Inspired by the events of 2012, the issue is formally modelled by Corsetti and
Dedola (2014).
93
Europe, measures of inflation expectations based on both surveys of

professional forecasters and overnight inflation swaps (OIS) had been
falling since mid-year. The ECB was now alert to the deflation danger,
perhaps because deviations from its 2 percent inflation target spoke of
the existence of a problem in familiar terms. After some hesitancy, the
central bank sent increasingly urgent signals, in the course of 2014, that
it was prepared to take additional measures to combat deflation. The
governing council cut the deposit rate for commercial banks, keeping
funds at the central bank to zero. In June, in an unprecedented step, it
moved the deposit rate into negative territory at -0.1 percent. Draghi
highlighted deflation risk in his speech to a Federal Reserve conference
in Jackson Hole, in August. Then, in September, the ECB cut its main
refinancing rate to virtually zero—actually, to 0.05 percent, but no mat-
ter. In the spirit of the earlier covered-bond program, now extended to a
second tranche, it announced the intention of purchasing asset-backed
securities with investment-grade ratings.
All of this fell conspicuously short of quantitative easing—that is, of
unconditional purchases of government bonds on the open market—
of the sort pursued by other central banks like the Fed, the Bank of
England, and the Bank of Japan. The ECB’s conventional policies also
visibly failed at containing deflation risk; the ECB’s own survey of pro-
fessional forecasters showed longer-term inflation expectations falling
again between the third and fourth quarters of 2014 and as being even
lower for 2015 Q1. Market-based measures like OIS continued heading
down as well in late 2014 and early 2015.
The result was the central bank’s “crossing the Rubicon” moment on
January 22nd, when Draghi announced a program of purchases of gov-
ernment bonds and private sector securities of €60 billion a month, ex-
tending through at least September 2016. The early returns were positive.
The euro depreciated against the dollar and on an effective basis, which
was desirable from the point of view of pushing up local-currency prices
of exportables. The inflation forecast implicit in five year forward swaps
rose from 1.5 percent in January to 1.7 percent in June. At this point, the
ECB felt comfortable about revising upward its forecasts for inflation and
predicting that they would approach its 2 percent target in 2017. Economic
growth accelerated modestly if visibly. In the ECB’s survey of financing
conditions for smaller firms published in June, it reported an improvement
in the availability of bank loans. After six months, it was still too early to
declare victory, but these achievements at least constituted a strong start.
94
This, in turn, raises the question of why adoption of the policy took so
long, other major central banks having turned to QE years earlier. There
were doubts about the effectiveness of security purchases, given the
bank-based nature of Europe’s financial system. There were questions
about whether there existed an adequate stock of investment-grade se-
curities to buy. Draghi himself worried about the Berlusconi problem—
that ECB purchases of government securities might relieve the pressure
THE EBA AND THE ECB ITSELF WERE CONSIDERED

FOR THE ROLE OF SINGLE SUPERVISOR OF THE BAILOUT,
AND THE LATTER WAS CHOSEN
on governments to pursue fiscal and structural reforms. Therefore, he

used his Jackson Hole speech in August to emphasize that the central
bank by itself couldn’t solve all of Europe’s problems and to imply that
he would be comfortable about moving to QE only with assurances that
governments would stay the reformist course.
But surely the most important reason it took 2 and a half years, follow-
ing the development of significant deflation risk, for the ECB to take this
fateful step was that it took that long for Draghi to cultivate support for
the policy within the governing board. It took overwhelming evidence
that the Eurozone was at risk of deflation for the skeptics to swallow
their reservations. Draghi had to convince the German members of his
board that QE didn’t augur runaway inflation and that it wouldn’t sub-
vert reformist effort. Only at this point, almost 17 years after it came into
existence, did Europe finally have a central bank prepared to pursue its
core mandate—of preventing inflation from deviating dangerously from
2 percent in either direction—by using whatever tools might be required.
*****
The depth of the difficulties experienced by European countries starting

in 2010 highlighted the folly of monetary union without banking union.
Large capital flows between Northern and Southern Europe in the peri-
od preceding the crisis had contributed to the difficulties that followed.
Heavily indebted sovereigns were then hamstrung when required to
recapitalize their banking systems. The institutional response had three
elements: the ESM to provide emergency finance, a bail-in procedure to
95
ensure that bank equity and bondholders shared the burden of recapi-
talization, and a single bank supervisor to limit the likelihood that such
problems would arise in the first place.
There were questions about whether the ESM was adequately capital-
ized and whether the EU’s bail-in protocol was workable.17 But perhaps
the most contentious issue was where to situate the single supervisor.
One option was the European Banking Authority, or EBA, which was
responsible for setting regulatory standards for banking practice in the
European Union. But the EBA and its predecessor, the Committee of Eu-
ropean Banking Supervisors, had not exactly covered themselves in glo-
ry in the run-up to the crisis. And it was a problem, from the standpoint
of the monetary union, that the EBA was headquartered in London.
The other obvious candidate was the ECB, since money and finance
were closely intertwined and central banks effectively exercise supervi-
sory responsibility in a number of other jurisdictions. Indeed, the expe-
rience of some countries, the United Kingdom for example, had under-
scored the dangers of separating supervisory and lender-of-last-resort
responsibilities. (Lack of coordination between the Financial Services
Authority and Bank of England having been a factor in the run on the
building society Northern Rock, the decision was taken subsequently
to consolidate the two functions at the central bank.) It can also be
argued, in favor of the current British arrangement, that knowledge
of financial conditions gained through direct supervision is useful for
monetary policy.
A problem was that the ECB possessed little staff with the relevant
expertise. Designating the ECB as the single supervisor also raised
questions about whether it should and could have responsibility for
supervising the systemically important banks of European countries
that were not members of the monetary union. European Commission
President Barosso reportedly favored the EBA on these grounds. There
were also fears that giving the central bank responsibility for bank
supervision could create a conflict between functions, when, for exam-
ple, inflation control dictated higher interest rates but the needs of the
banking system pointed to the need for lower ones.
Clearly, there was no perfect solution to this assignment problem. In
the end, the decision was taken to make the ECB the single supervisor
17 S
ince many of the bondholders who would be bailed in might, in practice, be other
troubled banks.
96
The president of the ECB, Mario Draghi, in a press conference.
and to allow EU members that had not adopted the euro to opt in to
this part of the banking union. The decision reflected knowledge that
other jurisdictions had been moving in the direction of consolidated
supervision. It demonstrated that the ECB had shown itself as capable
of growing into new responsibilities. It also showed that the ECB was
an independent institution perceived as possessing, or as capable of
acquiring, the relevant competencies. And it was expedient as a way
of avoiding the need for a treaty change, since assigning supervisory
responsibility to the Bank could be based on the existing Article 127 (6).
Finally, the assumption by the central bank of this new responsibili-
ty reflected effective lobbying by ECB officials happy to expand their
domain. Chang (2015) suggests that Draghi, in particular, supported
selection of the ECB, for two reasons. First, the central bank’s role as
lender and liquidity provider to the banks gave it a direct interest in
effective supervision. Second, Draghi was a policy entrepreneur who
hardly minded that his institution thereby acquired an expanded role.
The ECB subsequently embarked on a binge of hiring staff with ex-
perience in bank supervision. It sought to address potential conflicts
of interests by establishing a Supervisory Board, separate from but
reporting to the Governing Council, and by limiting data exchange be-
tween the two committees. The Governing Council does not have input
into the decisions of the Supervisory Board but retains the power to
object to those decisions and to force the board to reconsider them.
97
How well this arrangement will work in practice, only time will tell. But
assigning significant supervisory authority over the banking and finan-
cial system to the central bank is, it increasingly appears, international
best practice. And the ECB’s assumption of this role is indicative of an-
other stage of the evolution of the institution into a modern central bank.
*****
Skepticism about the stability and sustainability of the Eurozone is

rife. The monetary union is heavily indebted. It lacks the wage flexibil-
ity, labor mobility, and federal fiscal system of other monetary unions.
But an even more fundamental reason for scepticism is that a normal
monetary union needs a normal central bank and that, until recently,
the Eurozone lacked one. The ECB focused single-mindedly on headline
inflation, raising interest rates at the worst possible time. It neglected
risks to financial stability in the run-up to the crisis. It opposed debt
restructuring where debt restructuring was needed. It hesitated to em-
bark on quantitative easing even when interest rates had fallen to zero
and the spectre of deflation loomed.
It is clear that the ECB has moved a considerable distance in re-
sponse to the crisis and is now evolving into a normal central bank. It
acknowledges its responsibilities as lender and liquidity provider of last
resort. It has shown itself capable of pursuing unconventional policies in
unconventional circumstances. It has softened its doctrinal opposition
to debt restructuring. It has assumed additional responsibilities for
banking and financial supervision.
It can thus be argued that the ECB has moved from part of the prob-
lem to part of the solution. The question for the future is whether the
institution will continue to show the capacity to adapt. If the explanation
for recent developments is leadership at the top, there is little reason to
be reassured, since that leadership can and, eventually, will change. If,
in contrast or in addition, the explanation is deep changes in the culture
of the ECB, then there is more reason for optimism.
98
RELATED ARTICLES:
Rules, Cooperation and Trust in the Euro Area
99
EURO P E’S GROWTH M O D E L IN CR ISIS
Europe’s economic model continues to benefit countries both at the core

and at the periphery; however, not all have benefited. The countries in
Europe that have come out well from the global economic and financial
crisis are those that have harnessed the forces of economic integration
most effectively and have addressed weaknesses in the organization
of work and welfare, in particular. But in understanding why in parts of
Europe the crisis has been so protracted, it is necessary to look beyond
structural deficiencies emphasized in Golden Growth and consider the
role of money and specifically the functioning of the Eurozone.
INDERMIT GILL is the Director MARTIN RAISER is the Coun- NAOTAKA SUGAWARA holds
of Development Policy in the Of- try Director for Brazil of the a BA in Political Science from
fice of the Chief Economist of the World Bank. He holds degrees in Meiji University, Tokyo, and
World Bank. Between 2008 and Economics and Economic His- a Master’s degree in Interna-
2013, he was the World Bank’s tory from the LSE and a PhD in tional Development from the
Chief Economist for Europe Economics from the University University of Pittsburgh. He is
and Central Asia. He directed of Kiel. He worked for the Kiel an economist in the Research
the 2008 World Development Institute of World Economics Department of the IMF. Previ-
Report “Reshaping Economic and the European Bank for Re- ously, he worked at the World
Geography”, and is a principal construction and Development, Bank in the Office of the Chief
author of several World Bank re- where he was Director of Coun- Economist and the Poverty
ports, including “Golden Growth: try Strategy and Editor of the Reduction and Economic Man-
Restoring the Lustre of the Eu- Transition Report. Since joining agement Unit of Europe and
ropean Economic Model”, “Di- the World Bank, he has held Central Asia Region, and in the
versified Development: Making positions as the Country Man- Development Research Group.
the Most of Natural Resources ager in Uzbekistan, Economic He has numerous research
in Eurasia” and “An East Asian Advisor in Ukraine and Country publications related to interna-
Renaissance”. He has a PhD. in Director for Ukraine, Belarus tional economics and finance,
Economics from the University and Moldova, and as Country fiscal policy and financial sec-
of Chicago. Director for Turkey. tor development.
100
T H E U NRES O LVED LI M I TS O F E URO PE A N D THE N EW GLOB A L POWER S
EUROPE’S GROWTH
MODEL IN CRISIS
Introduction
In early 2012, the World Bank issued a report on Europe’s growth model
(Gill and Raiser 2012). Looking at six main elements of the model—trade,
finance, enterprise, innovation, labor, and government—, we concluded,
overall, that Europe’s growth model had worked well during the pre-
vious 50 years. Europe had brought two hundred million people from
middle to high income through the forces of economic integration. Eu-
ropean companies had generated productivity gains, exports, and jobs,
and Europeans enjoyed lifestyles that were rightfully the envy of many
around the world. But while Europe’s growth model was not broken, it
needed improvement. European governments were slowing economic
growth because they had become extremely large without becoming
commensurately efficient. European labor markets and social security
systems were struggling to adjust to the reality of an aging population.
Too many European companies had failed to innovate, and Europe had
left sizeable gains from integration in services—especially modern ser-
vices—unexploited.
EUROPE’S GROWTH MODEL HAD WORKED WELL

DURING THE PREVIOUS 50 YEARS, BRINGING TWO HUNDRED
MILLION PEOPLE FROM MIDDLE TO HIGH INCOME, AND
COMPANIES HAD GENERATED PRODUCTIVITY GAINS
We wrote that assessment at a time when Europe was grappling with

an economic and financial crisis. Today, four years later, our assessment
remains fundamentally unchanged. The countries in Europe that have
come out favorably from the global economic and financial crisis are those
that have harnessed the forces of economic integration well and have best
addressed weaknesses in the organization of work and welfare. Europe’s
economic model continues to benefit countries both at its core and periph-
ery. Seeing these successes, it is not difficult to remain optimistic.
101
But not all countries are doing well, and their sluggishness does not
help those that have been more diligent and dynamic. In understanding
why the crisis has been so protracted in some parts of Europe, it is nec-
essary to look beyond the deeper structural deficiencies emphasized in
Golden Growth and to consider the role of money. In Golden Growth, we
deliberately avoided a lengthy discussion of the common currency and all
its complications because the scope of the study was broader—it includ-
ed 45 countries, only 17 of which had the euro—and longer—it studied
these economies during six decades, and the euro had existed in only the
last one. Cyclical and structural factors are difficult to compartmental-
ize, however, and the Eurozone is a big part of the European economy.
For now and in the foreseeable future, the European economic model is
best understood as a combination of six components: trade, enterprise,
finance, money, labor, and government.
THE PRINCIPAL FAILURE WAS NOT

RECOGNIZING GREECE’S DIFFICULTIES AS
A SOVEREIGN SOLVENCY EARLY ON
Our interpretation of the Eurozone crisis emphasizes the underlying

failure to achieve a real convergence, which made a crisis almost unavoid-
able in the event of asymmetric external shocks. However, design flaws
and policy mistakes arguably made matters worse. The principal failure
was not recognizing Greece’s difficulties as a sovereign solvency early
on. In addition, European policymakers failed to sever the “doom-loop”
between sovereigns and banks across the Eurozone (see also Baldwin
and Giavazzi 2015).
This chapter expands and updates the 2012 Golden Growth analysis,
illustrates the cases of post-crisis success and continued stagnation
among Europe’s economies, and expands the original framework by
complementing the discussion of finance with a section on money. Our
recommendations for improving Europe’s growth model follow from the
assessment of Europe’s strengths and weaknesses: trade and enterprise,
finance and money, and labor and government.
Relatively few changes are required to the organization of trade and
enterprise. As in 2012, there is the need to strengthen the common market
in services and to make it easier for entrepreneurs to enter new markets,
invest abroad, and grow their businesses worldwide. This will contribute
to a restart of what we called Europe’s “Convergence Machine.” Europe
102
remains unique in having a mechanism by which poorer and newer mem-

bers of the extended European Union can quickly get to the income and
productivity levels of the more advanced EU core. This is Europe’s strong-
est and most desirable attribute, and it should be strengthened and ex-
tended to aspiring members in the Balkans and the East. It will require
greater efforts in those countries that have neglected to create an attrac-
tive business environment, but it also requires a continued openness in
the member states of the European Union.
More changes are needed in the two interrelated components of finance
and money to insure Europe against the risks of fiscal-financial excess,
especially in the Euro area. Several important steps have been taken.
The most important is the establishment of a banking union to jointly
supervise the Eurozone’s systemically important banks with a common
backstop to prevent banking sector problems from becoming sovereign
debt problems. New rules have also been issued to guarantee greater
fiscal discipline in the European Union. But several challenges remain.
The absence of a mechanism to allow sovereign default within the Euro
area means that governments do not benefit from market signals in re-
inforcing fiscal discipline. The small size of the common banking sector
backstop, in turn, means that the doom loop between banks and sov-
ereigns has not been completely broken. Addressing these challenges
would allow finance to reemerge as the lubricant of economic conver-
gence across the EU, a role it played successfully in the East during the
2000s, but met with spectacular failure in the South.
Before the crisis, the biggest changes needed in Europe’s economic model
were in the organization of labor and government. Developments during
the last four years have made these changes even more urgent. With unem-
ployment rates above 20 percent in many countries and public debt levels
swollen both by chronic deficits and by the added burden of bank bailouts,
a spotlight has been turned on Europe’s greatest weaknesses: labor and
welfare. There are some encouraging signs, however. Labor market reforms
have begun in Spain, Italy, and, more recently, in France. Labor mobility has
been increasing steadily across the EU. Some European countries—most
notably Germany—have shown an enlightened attitude towards migration
in the face of their own demographic decline. But much more remains to
be done, particularly to rein in excessive and unaffordable social welfare
spending and to restore sustainability to public finances. Europe has prid-
ed itself on a lifestyle that balances work and leisure. For an increasingly
large number of people in Europe—especially its youth—, this has become
103
a distant aspiration. The organization of work and welfare will need deeper
adjustments if Europe is to remain the world’s “lifestyle superpower.”
Europe’s economic model before the crisis—a scorecard
Europe’s economic model, fashioned and followed since World War II and
progressively enlarged to cover much of the continent today, has distinct
features. Perhaps more than others around the world, Europeans want
economic growth to be smarter, kinder, and cleaner, and they are willing to
accept less for “better” growth. Europe’s economies are also more mature
and its societies older than those of most other regions. In both respects,
Europe’s growth can be called “golden” (Gill and Raiser 2012). But, in parts
of Europe, policies have deviated from growth’s “golden rule” as current
generations have consumed more than they have saved, and debts have
accumulated that risk weighing down the prospects for future generations.
The challenges of debt and aging have motivated calls for radical changes
in Europe’s economic model. Our analysis, four years ago, cautioned that
in their zeal for change, Europeans should take care not to throw out the
attractive attributes of their model together with the weaker ones. We
start this article with a summary of our argument.
Three major achievements summarize the strong points of Europe’s
economic model: (i) economic convergence has lifted millions of people
above the threshold to high income; (ii) design and dexterity have se-
cured Europe’s global economic heft; and (iii) the European way of life
is admired and envied around the world.
The Convergence Machine
Europe has achieved unprecedented regional integration, and this has

facilitated a process of economic convergence that is globally unique
(Chart 1). Between 1950 and 1973, the incomes of 100 million Western
Europeans converged rapidly towards those in the United States. In the
subsequent two decades, another 100 million people in Southern Europe
crossed the threshold to high income, following the same pattern of inte-
gration and convergence. Over the past 25 years, it has been the Eastern
Europeans’ turn to benefit from Europe’s Convergence Machine. Today,
another 100 million people in candidate countries in the Balkans and
Turkey are aspiring to follow them.
104
Trade and finance are the two elements of Europe’s economic model
which have been most closely associated with this achievement. In 2008,
almost half of the world’s goods trade involved Europe. Compared with
Asia, which has established itself as the world’s factory over the past two
decades, European trade remains distinct. In Asia, China serves as the
gateway to the world—other countries trade with China, and China ships
goods to global markets. In Europe, while two-thirds of trade remains with-
in the region, the new member states in Eastern Europe have seen their
share of trade with traditional EU members progressively decline (Chart
2). Trade with the EU has made these countries globally competitive as
their trade has become ever more sophisticated. FDI and offshoring, in
turn, have made Western European companies more competitive. The
challenge for European trade going forward is to deepen integration in
services, particularly professional services, such as ICT, legal services,
and insurance, but also in transport and energy sectors. Overall, trade is
the most attractive attribute of Europe’s economic model.
Finance has been the second pillar of Europe’s economic convergence.
Economists have long been puzzled why capital in the world fails to flow
Chart 1
105
systematically downhill. In other words, poorer countries have often ex-

ported capital, and those that have not done so have tended to grow less
than those that have. This is not the case in Europe. The decade before
the financial crisis saw an explosion of cross-border capital flows in the
EU and its neighboring countries and—by and large—these flows have
financed higher growth in Europe’s emerging markets and have contrib-
uted to convergence (Chart 3). But, as discussed further below, there
have been excesses, and their correction has proven enormously costly,
particularly in the Eurozone. In our assessment, four years ago, finance
was seen as one of Europe’s strong points. This is still true in parts of
the region. But, in others, primarily in the Eurozone and some of the
countries of the Eastern Partnership, financial flows have masked the
lack of real integration, have financed consumption and real estate booms
rather than productive investments, and have left recipient countries
with a huge debt overhang when the flows stopped. Below, we assess the
changes made and the reforms still needed in the regulation of finance
to ensure it remains a catalyst of convergence.
Chart 2
106
Brand Europe
Europe’s companies have become globally recognized for the high quality
and elegant design of their products and services and—the recent Volkswa-
gen scandal notwithstanding—admired for their social and environmental
responsibility. This has given Europe a distinct brand and ensured that
the continent continues to enjoy global economic heft. While nurturing the
brand, European companies have delivered what was expected of them:
productivity, jobs, and exports (Chart 4). However, this overall positive as-
sessment of European enterprise is subject to considerable differentiation
across various parts of the region. Productivity growth in the EU15 could
have been faster (and, indeed, should have been faster to allow the EU15
to catch-up with productivity levels in the US), and employment growth
in the new members states has been subdued.
But the biggest worry is about productivity patterns in Southern Europe
since 2002. While Greece, Italy, Portugal, and Spain created plenty of jobs
between 2002 and 2008, these were mainly in cyclical activities, such
as construction, or in less productive micro and small enterprises. As a
Chart 3
107
result, while productivity in the rest of Europe converged, enterprises in

Southern Europe, on average, became less productive (Chart 5).
One reason for these developments in the Southern EU15 has been that
regulations of product and labor markets have not been conducive to the
creation of productive jobs (Chart 6). Red tape and onerous tax and labor
regulations have discouraged companies from growing and kept them fo-
cused on domestic markets (Dall’Olio et al. 2013). Lack of internationali-
zation has meant that enterprises in the South have benefited less from
economic integration and have fallen behind in the attraction of FDI and
the integration into global value chains. For a while, the massive inflow of
financing was able to mask these weaknesses and may have aggravated
them by pushing up wages and production costs in the deficit countries.
Increasing competitiveness has thus been rightly at the center of structural
reform efforts in Europe’s periphery since the global financial crisis, and
in the most aggressive reformers, these efforts are starting to bear fruit.
To maintain its brand, Europe will also need to tackle the gap in inno-
vation with the US, the world’s technological leader. Here too, there is
considerable variation across the region, with Scandinavia, the Benelux,
Chart 4
108
Germany, Austria, and Switzerland leading the way for the rest. But on
the whole, Europe has benefited less from the ICT revolution, and after
having converged with productivity levels in the US until 1995, in recent
years, the gap has widened again.
The Lifestyle Superpower
European workers are accorded strong protection against abuse by em-

ployers, and have unprecedented income security after job loss and in
old age. Europe’s organization of work and government has made the
European lifestyle admired and envied around the world. It has also
been expensive. With only 10 percent of the world’s population, Europe
accounts for over half of the world’s spending on social security, and
European governments are larger than anywhere in the world (Chart 7).
As incomes have increased, Europeans have been able to work less and
still enjoy rising standards of living. By and large, Europeans work fewer
hours a week, fewer weeks in a year, and fewer years in their productive
lives than they did in 1960. They also live a lot longer than they did 50
Chart 5
109
years ago (Chart 8). With aging societies, the pressure on social security
systems is expected to increase even more going forward. In short, in many
European countries, public pension systems have become unsustainable,
and the burden of payroll taxes used to finance social security and health
systems in Europe is already the highest in the world. The elderly are
hardly better off for it. Southern EU15 countries, in 2007, spent around
three times more as a share of their GDP on public pensions than the
Anglo-Saxon countries (US, UK, Australia, New Zealand), but real public
pensions in PPP US$ per retiree were only 15 percent higher. To maintain
their lifestyles and sustain public finances, Europeans will have to retire
later. Many already do, and the experience suggests this is good for them
as well as their countries (Arias and Schwartz 2014; Bussolo et al. 2015).
In 2012, we gave Europe the highest marks for trade and finance, asso-
ciated with Europe’s success in economic convergence. The lowest marks
were received for the way European countries organized work and govern-
ment, with the performance of the environment for business and innova-
tion somewhere in between. Our recommendations were most extensive
regarding reforms of labor markets, social security, and the management
of public debt. Fewer changes were recommended to reform the business
climate and innovation systems and fewer still in the regulation of finance
and the deepening of the Common Market. However, developments during
the last five years provide reasons to reassess the European growth model.
Chart 6
110
What has happened since the crisis?

Convergence in one part, divergence in another
The global financial crisis initially affected mostly countries in the Eu-
ropean periphery, such as Ukraine, which saw their economies suddenly
cut-off from international capital flows. But, in October 2009, when a
new government in Greece revealed that previous fiscal accounts had
been fudged to hide the true size of the deficit, the crisis spread to the
European Union, especially to the Eurozone. The mechanics of how the
crisis spread were the same in the Eurozone and in emerging markets
(Baldwin and Giavazzi 2015). Concerns about a country’s ability to repay
its foreign creditors led to a sudden stop in capital flows, necessitating
deep adjustments in external balances. The effect of the crisis on the
banking sector of deficit countries and through the banks on public debt
sustainability acted as a massive amplifier, particularly in the Eurozone.
But at the heart of the crisis were divergences in competitiveness that
needed to be redressed. Without the ability to devalue, deficit countries
in the Eurozone were forced into sharp austerity.
In this section, we examine developments in Europe since 2008, look-
ing first at economic performance and the extent to which adjustment
and structural reforms have helped close the competitiveness gap across
Europe.
Chart 7
111
The European Convergence Machine after the Crisis
Europe’s economic performance since 2008 has been lackluster as a whole.

Real GDP barely exceeds the peak reached in 2007 in most countries in the
region. However, there has been considerable regional variation (Chart 9).
The new member states of Eastern Europe recovered more quickly than
the European core and have continued to converge since 2009. Indeed,
the largest among them—Poland—never experienced a recession, and its
GDP in 2014 stood fully 21 percent above the level of 2007. The Baltics
saw a dramatic fall in output and a similarly dramatic turn-around as
they slashed public spending and real unit labor costs, thereby eliminating
external imbalances that had exceeded 10 percent of GDP within just two
years and restoring access to market financing. Bulgaria and Romania have
continued to grow at rates above 3 percent since 2010. It is in the EU15
South that overall performance has continued to diverge, with median
GDP now some 10 percent below the 2007 peak.
The picture is not very different if we look at labor productivity growth
since the crisis (Chart 10): sluggish growth of around 1.7 percent in the
EU15 North and Core, an expansion around twice that rate in the EU13,
and negative productivity growth on average in the EU15 South, with
significant declines in Greece and Portugal.1
Chart 8
112
With declining or sluggish productivity, adjustment in competitive-

ness has had to come through declines in wages. Real unit labor costs
have declined between 15 percent in Spain and Portugal and 20 percent
in Greece and Ireland since their peak, and today they have returned
to levels in the early 2000s (IMF 2015). Current account imbalances
have been largely eliminated, with swings of over 10 percent of GDP
in Greece and Portugal and 5 percent in Spain (Chart 11). Adjustments
have also been significant in parts of the new member states. However,
a parallel adjustment has failed to take place in the surplus countries,
most notably Germany. This has led to criticism that the costs of ad-
justments have been born only by the deficit countries. While Germany
would help economic rebalancing in Europe with more robust domestic
demand, it is wobbly investment rather than subdued consumption that
is holding Germany back (Schmieding 2015). This reflects deleveraging
in the banking sector and is unlikely to be helped by attempts to erode
Germany’s relative competitiveness (although more public investment
spending would clearly help both Germany and its EU partners). Instead,
Chart 9
1 T
he substantial increase of productivity in Italy reflects developments in manufactur-
ing, which saw an increase in value added and a substantial reduction in employment.
As noted in Dall’Olio et al. (2013), Italy represents an interesting case, with a highly pro-
ductive and competitive manufacturing sector in the northern part of the country, and
a large tail of very unproductive micro enterprises in the rest.
113
countries in the Eurozone periphery will have to reform to make their

economies more attractive and their businesses more productive.
A lot of this is already happening. Eastern Europeans have continued to
lead the way in making their business environments friendlier, but Greece,
Portugal, and Italy have also made an effort (Chart 12). According to the
OECD, Greece, Portugal, Ireland, and Spain are the top four countries when
it comes to implementing reform recommendations (OECD 2015). This is
true not only for the business environment, but labor markets are also be-
ing reformed and made more flexible. According to OECD’s employment
protection legislation (EPL) index, the EU15 South now has more flexible
labor markets than the EU15 core (Chart 13). Germany’s labor market re-
forms of 2003 are often cited as an example of the benefits that come with
lowering hiring costs and moving from a system job protection to one that
incentivizes job search while providing temporary income security to the
unemployed. Labor market reforms are working in the South, too. By the
end of 2014, unemployment was down 1.4 million in Greece, Ireland, Portu-
gal, and Spain, a decline by 16 percent from the peak in early 2013. Except
in Portugal, employment growth in the other three countries in 2014 was
running at almost twice the rate as in Germany.2
Chart 10
114
When we published Golden Growth, we said it would not be difficult to

restart Europe’s Convergence Machine. The evidence suggests to us that
optimism was justified. Adjustment is happening faster in the countries
that started to reform earlier, such as the Baltics, and less painfully in
those that went into the crisis with a stronger structural position, such
as Ireland and Spain. Reforms of the Common Market, particularly its
extension to services, have proceeded less rapidly, but with the pressure
of a possible trade agreement with the United States and the evident
need for more harmonious regulations in sectors such as finance and
energy, here too progress is likely.
It is on the periphery of the European Union, in the western Balkans
and in Turkey, and even more in the countries of the Eastern Partner-
ship that the European Convergence Machine has continued to splutter.
Without clear accession prospects, for instance, structural reforms in Tur-
key have largely come to a standstill (see Acemoglu and Ucer 2015, in this
volume). Growth in the western Balkans remains well below levels in the
EU13, and prospects are marred by recurrent political instability. Literally
torn between Russia and the EU, the countries of the Eastern Partnership
Chart 11
2 Greece was dragged back into recession by the brinkmanship and resulting erosion of
confidence of the new government in early 2015.
115
have benefited from neither European nor Russian investment and have
been shattered by war, scandal, and capital flight. We hope that the signs
of recovery in Europe’s economy and the evidence that the Convergence
Machine still works will encourage politicians in both the EU and in its
neighborhood to redouble their efforts at closer economic integration and
ultimately re-open the process of EU enlargement. The Common Market
remains Europe’s most attractive attribute and its most successful policy.
Financial integration and the Euro
When the Euro was created, many expected it to yield dual benefits: it
would make doing business less costly across the Eurozone and thus en-
hance economic integration, and it would provide a macroeconomic an-
chor for its weaker members, forcing them to maintain fiscal discipline
and to keep the economies competitive. However, others warned that the
Eurozone did not fit the requirements of an optimum currency area. Spe-
cifically, Europe’s rigid labor markets were seen as a major risk since they
would make adjustment much more difficult in case of an asymmetric
shock. Indeed, labor mobility in Europe has remained among the lowest
in any advanced country.
Chart 12
116
The crisis in the Eurozone has confirmed the views of the skeptics.
The Euro did catalyze an enormous increase in cross-border financial
flows and a resulting rapid convergence of borrowing costs, but it did
not lead to greater real integration (Sugawara and Zalduendo 2010). The
business cycles of countries in the Eurozone periphery did not become
more synchronized with the core, and trade integration did not increase
by much. In the EU15 South, convergence in per capita incomes also
stalled in the 2000s. Labor market mobility remained low throughout
the EU. Cross-border flows exploded but financed mainly unsustainable
consumption and real estate booms. When Eurozone investors started
questioning the ability of borrowers in other countries to repay, capital
flowed out, yields went up, and the deficit countries—unable to deval-
ue—were forced into a painful economic adjustment (Chart 14).
The experience in the new EU member states was quite different. Here,
too, the first decade of the 2000s saw significant capital inflows. However,
these flows facilitated both nominal and real integration (or at least did
not reduce the level of real integration). When the tide turned, these
countries, even those that had joined the Euro (Slovakia) or fixed their
exchange rates to the Euro (Bulgaria, the Baltics), were able to adjust
with much lower costs in terms of output and employment.
Chart 13
117
What accounts for these different experiences with financial integration?

One reason has to do with the greater structural flexibility of the new mem-
ber states, as reflected in generally better scores in the quality of the busi-
ness environment, for instance. A second explanation is that the nature
of the capital flows was quite different. Within the Eurozone, much of the
cross-border flows were intermediated by banks, whereas other parts of
the region saw greater reliance on equity flows (Chart 15). When the tide
turned, much of the earlier banking sector inflows were reversed (Chart 16).
Equity flows involve a greater degree of risk sharing between investor
and investee than debt flows do between creditor and borrower. They
are thus inherently less easy to reverse. But within the Eurozone, sev-
eral factors served to amplify the negative effects of excessive banking
sector leverage. First, much of the cross-border lending was bank-to-
bank lending. Total lending by banks in the core Eurozone countries to
Greece, Italy, Ireland, Portugal, and Spain increased by a whopping 1.5
trillion Euros in the decade after the introduction of the Euro, or some
340 percent. Without Italy, the increase was 1 trillion Euro, or 495 per-
cent (Baldwin and Giavazzi 2015). This was a significant accumulation
of bank debt in both the lending and receiving countries.
However, the supervision of banks as well as national safety nets to pro-
tect depositors and prevent a bank run were left to the responsibility of
Chart 14
118
individual countries. When the bubble burst, debtor country governments

stepped in to save their financial systems. The resulting increase in public
sector liabilities pushed governments in Ireland and Spain over the edge
of debt sustainability, despite their strong fiscal positions pre-crisis.
Second, in the case of Greece and, to a lesser extent, Portugal, domestic
banks were heavily exposed to their own governments. When Greece re-
vealed, in October 2009, that its fiscal deficit was over 12 percent of GDP,
investors started to question the government’s ability to repay. When the
first bail-out was agreed in mid-2010, Eurozone governments decided against
Greece going to the IMF. Greek debt to commercial banks in France and Ger-
many was exchanged for debt to public creditors—principally the ECB and
the European Stability Mechanism. This failed to stem concerns over pub-
lic debt sustainability, and contagion thus spread from Greece to Portugal,
Ireland, Spain, Italy, and, for a while, even to Austria, Belgium, and France.
Rising yields on public debt of the affected countries made concerns over
debt sustainability a self-fulfilling prophecy. Financial markets fragmented
as rising public sector yields drove up private borrowing costs and capital
flooded out of all periphery countries, leaving both solvent and insolvent
Chart 15
119
borrowers without access to liquidity (Gill et al. 2014). Only with ECB
President Mario Draghi’s “whatever it takes” speech, in August 2012, did
calm gradually return to the Eurozone’s public debt markets and eventually
to its financial markets. As of mid-2015, sovereign spreads have converged
again, corporate spreads have followed suit, and net banking flows to the
non-financial sector have turned positive for the first time since late 2011.
Policy mistakes and design flaws combined to push the Eurozone further
into the debt vortex. It can be argued that Ireland would have been better off
to force creditors to share the burden of adjustment, as was done by Iceland,
for example. It can also be reasoned that if Greece had been forced into a
traditional IMF-led adjustment and debt restructuring program early on, the
contagion across Eurozone debt markets might have been better contained.
Going forward, the doom loop between banks and sovereigns needs to
be broken, and the supervision of European banks needs to be strength-
ened to risk-proof financial integration. European banks also need to be
encouraged to deal proactively with the stock of non-performing loans
(NPLs). Important steps have already been taken through the creation of
the Single Supervisory Mechanism under the ECB (accounting for around
Chart 16
120
80 percent of all Eurozone banking sector assets), the stress testing of

European banks, the creation of a Single Resolution Fund (SRF), and the
agreement for the European Stability Mechanism to directly recapitalize
systemically important banks. However, the combined resources of the
SRF (Euro 55 billion) and ESM recapitalization (up to Euro 60 billion)
are still small relative to the size of the Eurozone banking sector (Euro 22
trillion). While deposit insurance has been harmonized, no central deposit
insurance fund exists. Whether these measures would be enough in case
of another systemic crisis is not clear (IMF 2015).
The Lifestyle Superpower and fiscal adjustment
In 2012, we argued that Europe’s biggest adjustment needs were in the

labor market and in the size and effectiveness of government. While some
progress has been made in labor market reform (see above), the financial
crisis has accentuated the challenge of fiscal adjustment. As of 2015,
only 10 of the 28 EU member states are likely to meet the Maastricht
criterion of less than 60 percent public sector debt to GDP (Chart 17).
Chart 17
121
Based on 2010 debt levels and structural fiscal balances, we estimated

fiscal adjustment needs to range between 0.7 and 7 percentage points
of GDP annually just to bring debt levels below 60 percent of GDP in
Western Europe and 40 percent in emerging Europe (Chart 18). Add
the cost of future health and public pension spending due to aging, and
these numbers increase to between 4 and 11 percentage points of GDP
across the region.
Public pension systems pre-crisis were already the main reason why
governments in Europe were larger than elsewhere. The effect of the
crisis has further increased the share of social security spending in GDP
in most parts of Europe, most significantly in the Southern EU15 and
in the new member states of Central Europe (Chart 19). Public pension
spending will increase further as old-age dependency rates increase. The
most effective way to keep future pension deficits in check would be an
increase in the effective rate of retirement. Reductions in pension bene-
fits and the encouragement of complementary private savings would also
help. The inflow of migrant workers can temporarily smooth the increase
in old-age dependency rates, but unless sustained perpetually, it will not
Chart 18
122
prevent the effects of aging (Arias and Schwartz 2014). Europe prides
itself on the balance it has found between work and leisure. As Europeans
get older, they will have to balance leisure and work throughout their
adult lives, not just until their early 60s.
In the meantime, there is little alternative to greater fiscal discipline
in the countries that allowed government spending to balloon pre-crisis
(Greece, Ireland, Spain, the United Kingdom, and, to a lesser extent,
Portugal). In Ireland, Spain, and the United Kingdom, this was hidden
thanks to buoyant real estate linked tax revenues. But real spending in
all three countries increased by close to 50 percent between 2000 and
2009, compared to less than 15 percent in Germany and Italy (Chart
20). The subsequent adjustment essentially brought spending back to
pre-crisis levels, with the exception of Greece, where it declined to the
level of 2002, and the UK, where it has not declined by much.
While the speed of adjustment in the EU15 periphery is remarkable, its
extent is perhaps less calamitous when seen in context of the dramatic
pre-crisis increase in spending. Nonetheless, concerns have been raised
over the pro-cyclicality of austerity (Benassi-Quere 2015) and the impact
Chart 19
123
of declines in public investment on future potential growth. There is some

evidence supporting these concerns. The aggregate fiscal stance in the
Euro area has been mostly pro-cyclical, as fiscal adjustment coincided with
a growing output gap after 2010. Moreover, across the Eurozone, the coun-
tries with the largest fiscal adjustment during 2010 to 2015 were also those
with the largest output gap (Chart 21). Correspondingly, public investment
has declined by between 15 percent per annum in Spain and Cyprus, 10
percent in Ireland, Italy, and Portugal, and around 5 percent in Greece. On
the other hand, public investment has been essentially flat in the Eurozone
core and most of the Nordics, which have fiscal space and face record low
borrowing rates that should make public investment attractive.
As of 2015, the aggregate fiscal stance in the Eurozone has become
neutral. The pro-cyclicality of spending patterns across the Eurozone
has also become less pronounced (IMF 2015). With recovery on the ho-
rizon for almost all countries in the region, the time may have come to
leave the debate of growth versus austerity behind and begin the chal-
lenging task of long-term repair of public sector balance sheets. This is
important for all European countries. In the Eurozone, it is imperative.
To facilitate this process, the framework for fiscal governance in the EU
Chart 20
124
has been repeatedly revised. The resulting architecture now includes a

criterion for net expenditure growth to remain in line with trend GDP,
nationally differentiated rules for the structural fiscal balance and its
change year on year, and a criterion for the pace of adjustment of public
debt, in addition to the nominal deficit and public debt level criteria that
were part of the 1997 Stability and Growth Pact (SGP).
The framework is complex, and some of the targets are mutually in-
consistent (Andrle et al. 2015). National requirements, not all of which
are consistent with the requirements of the SGP, further complicate the
picture. Finally, concerns remain over the measurement of several of the
targets, particularly those relying on estimates of underlying or projected
growth. Simplification of the framework would likely facilitate monitoring
and enforcement and may help reduce output volatility going forward.
Whatever the fiscal rules, reestablishing long-term fiscal sustainability
will require reductions in spending in many countries. This need not
come at the cost of a reduction in the quality of public services. Countries
such as Sweden and Estonia have demonstrated how public spending
can be reduced through administrative reforms and changes in social
security arrangements without affecting public service delivery. Turkey
has shown how to escape rapidly from a public debt overhang and use the
resulting fiscal space to expand public services (Raiser and Wes 2014).
The vast differences in health spending between the US and France (with
Chart 21
125
minor differences in health outcomes) and similarly striking differences

in education outcomes in Finland and Italy (with similar spending lev-
els) are suggestive of the scope for quality improvements and efficiency
gains in key public services. Many Europeans would rather trade lower
growth for a higher quality of life. Without sustainable public finances,
they may end up with neither. If they trim their governments and make
them more efficient, they can have both.
Restoring the luster of the European economic model
Europe’s economic model has brought numerous benefits to Europeans

since World War II. In the face of Europe’s biggest economic crisis, it
is worth remembering its achievements. In our 2012 report on the Eu-
ropean model, we suggested that to keep what it had achieved, Europe
needed to improve, not discard, its economic model. Our views have not
substantially changed since.
The smallest improvements are required to restart Europe’s Conver-
gence Machine. As this article has shown, the machine never stopped
working for the new EU member states, but it is spluttering in Europe’s
periphery, among the accession countries and the Eastern partnership,
and went into reverse in the Eurozone. Structural reforms to make their
economies more flexible are now helping Ireland and Spain rediscover
their economic mojo, while Portugal has regained market access, and
sentiment in Italy is turning up. Growth may finally return to all coun-
tries in the Eurozone, with the exception of Greece, which is suffering
the effects of a botched bailout and political brinkmanship.
Much of the recent news is encouraging. But Europe could do more to
strengthen economic momentum, including in the core economies. In
France, tackling labor market rigidities and social security imbalances
may be the highest priority. Germany could do more to boost public
investment (Enderlein and Pisani-Ferry 2014), including improvements
in education. All EU countries could do more to deepen the Common
Market, particularly in services, and to reignite economic integration
and, ultimately, the accession process with their neighbors to the South
and East. The prospect of convergence through deeper integration is
perhaps Europe’s biggest attraction, and it should be nurtured.
Private finance has contributed significantly to economic integration
and convergence. But the crisis revealed serious flaws in the way banking
was regulated, particularly in the Eurozone. Risk-proofing financial inte-
gration will require further strengthening Europe’s common supervisory
126
architecture for systemically important banks and fortifying the firewalls

between banks and sovereigns. Europeans have become increasingly
skeptical of shared responsibility. This is one area where they should
overcome their hesitation. It will be easier to convince voters in surplus
countries to accept greater risk sharing if it goes hand in hand with
further efforts in the deficit countries to improve their competitiveness
and to restore long-term fiscal sustainability.
Fixing public finances and reforming work and government remain Eu-
rope’s most tricky challenges. In the short term, remarkable efforts have
been made, from Greece and Ireland to Latvia and Bulgaria, to bring public
spending into sink with economic potential. More could have been done in
countries with the required fiscal space to ease the adjustment, in particu-
lar through greater public investment. But unless we believe that interest
rates will remain low for a very long time, some fiscal adjustment will be
required in almost every European country. Governments should make
good use of improving economic conditions to implement difficult reforms,
particularly to public pension systems. Many Europeans today live much
longer and healthier lives than their parents. It is not clear why they should
spend many more years in retirement, when they, in fact, have the skills, the
experience, and often the desire to remain attached to the labor market.
Much can be learned from inside and outside Europe on how to tackle
Europe’s challenges (Iwulska 2012). The post-crisis years have added
a few more successful experiences to this list: Spain's labor market
reforms; the Baltics’ experience with adjustment under fixed exchange
rates; Portugal’s patient consolidation of its public finances; Ireland’s
success in export-led recovery at a time of a global trade slowdown;
and, of course, the growing evidence in favor of unconventional mone-
tary policies, including in the Eurozone, and perhaps particularly since
2012. Europe’s luster can be restored if policy makers build on these
experiences. Europe’s economic model was already distinct before the
crisis. By deepening the Common Market, fixing the financial system,
and restoring discipline and sustainability to public finances, European
policy makers can make the model distinguished.
RELATED ARTICLES:
The European Central Bank: From Problem to Solution
127
E U R O PE AN EM P LOYM ENT AND LABOU R MA R KET POLICY
COLIN CROUCH is a professor European policy strategy has shifted from

emeritus of the University of
maintaining a balance between expanding
Warwick and external scientific
member of the Max Planck In- market forces and social development policy to
stitute for the Study of Societies an attitude espousing a neoliberal insistence for
at Cologne. He is vice-president
for social sciences of the Brit- deregulation and the strengthening of markets.
ish Academy. He has published This change has had negative consequences for
within the fields of comparative
European sociology and indus- employment and labour policy. The relationship
trial relations, economic sociol- between consumption and job security has not
ogy, and contemporary issues
in British and European politics. been adequately addressed, and the implica-
His most recent books include tions of risk and uncertainty for the distribution
Making Capitalism Fit for Society
(2013); Governing Social Risks in of income have not been determined. Nor is
Post-Crisis Europe (2015); The there any response to the consequences of
Knowledge Corrupters: Hidden
Consequences of the Financial mass migration following the admission of new
Takeover of Public Life (2015). member states from Central and Eastern Europe.
128
EUROPEAN EMPLOYMENT
AND LABOUR MARKET POLICY
The European project has always been primarily a market-making one,

not very interested in social policy. However, for most of the history of
the European Union and its predecessors, there have been compromis-
es, often creative ones, between markets and social policy, or at least
mutual respect for different spheres of competence (Scharpf 1999). Re-
cently, however, the EU has become a more aggressively market-making
force, attacking areas of social policy formerly understood to be beyond
the scope of that strategy.
THE EU HAS BECOME A MORE

AGGRESSIVELY MARKET-MAKING FORCE,
ATTACKING AREAS OF SOCIAL POLICY
FORMERLY NOT CONTEMPLATED
This move has been two-pronged, operating partly through the gradu-
al expansion of the general powers of competition policy and the Court,
and partly through explicit new policies. Central to both has been the
extension of the single market into what used to be called public ser-
vices, but which EU jargon now calls “services of general interest”.
The biggest single example of a new market-making policy likely to
threaten broad areas of social policy has yet to take practical form:
the proposed Transatlantic Trade and Investment Partnership (TTIP)
between the EU and North America. If implemented as now envisaged,
this partnership will involve rescinding large amounts of regulation that
was previously deemed necessary to protect consumers, workers and
the general public from the negative consequences of profit-making
business activities.
TTIP is seen by its proponents and critics alike as a perfect example
of neoliberal economic strategy, but it is doubtful whether it really mer-
its the name “liberal”. Its negotiations are being carried out in secret
between Commission officials and business lobbyists from large global
129
corporations; neither secrecy nor the dominance of corporate politi-

cal lobbies, rather than markets, has any legitimate place in “liberal”
politics or economics. However, our task here is not to deal with the
general development of the EU but with the specific field of employment
and associated social policy. It will not be possible to include possible
labour policy implications of TTIP because, as a result of the secrecy
surrounding the exercise, very little is known.
In the first few decades of European integration, the need to reconcile
market-making and social policy was largely bypassed by a division
of labour. There was a consensus that the primary role of European
institutions was to increase the openness of markets. This was not be-
cause of an ideological view that there should be no social policy, but
rather this was the province of national states—mainly because these
needed to reconstruct their legitimacy with their citizens after years
of dictatorship or betrayal during the 1930s and early 1940s. This did
not mean, as many British politicians claim, that Europe was initially
intended to be only a “common market”, and that a wider socio-political
agenda was a later and never fully agreed extension.
EUROPEAN POLICY HAS BECOME

INCREASINGLY NEOLIBERAL ON LABOUR
MARKET DEREGULATION WITHOUT
A COMPENSATING DEVELOPMENT
At the general level, the 1956 Treaty of Rome spoke clearly of “ever
greater union”, implying that market making was only the start of a
more ambitious project. Second, even the original common market in-
cluded sensitivity over the impact of intensified competition for the
stability of workers’ lives, especially in the two sectors that were of par-
ticular importance in the post-war years: agriculture, and coal and steel.
When the first crises of deindustrialization began to hit the advanced
economies in the 1970s, this approach was extended to the structural
funds programme for regions hit by industrial decline or other problems
of development.
Poor regions have also received help to establish infrastructure pro-
jects, the gains from which would be too long-term or too collective for
the market to have taken on the burden of providing them. This has been
particularly important for new member states with development prob-
lems, initially in South-Western Europe and more recently in Central
130
and Eastern Europe. Beyond these issues, however, and especially where
policies directly affecting individuals were concerned, initial European
social policy was largely limited to ensuring international transfer of
various entitlements for the small numbers of workers who moved to
other member states.
A period of more intense European social activity occurred during the
Delors presidency, when the single market was being constructed (Eu-
ropean Commission 1993). Political polemics suggest that market-mak-
ing and social policy are opposed in a zero-sum game. The evidence,
however, argues that they are complementary: advances in either one
require advances in the other. The single market programme was a
good example of this. Europe was seen to need both more efficient la-
bour markets and some European-level social policy. If markets were
to be intensified, so too must be compensation for the disruption they
necessarily cause, action to cope with their negative externalities, and
measures to provide the infrastructure that they need but often cannot
provide for themselves. This resulted in some constructive redefini-
tion between European and national levels. For example, the Treaty of
Maastricht contained a “social chapter”, according to which the Euro-
pean organisations of social partners could agree that a particular issue
would be the subject of an EU directive. There was an initial flurry of
these, but it then subsided.
Since that time, the emphasis of European policy has changed to an
increasingly neoliberal insistence on labour market deregulation with-
out a compensating development of new social policy. This move has
been two-pronged, operating partly through the gradual expansion of
the general powers of competition policy and the Court, and partly
through explicit new policies (Höpner 2008, 2014).
Whereas the institutions and policies under attack have had mainly
restrictive implications for the functioning of the labour market, these in-
terventions have had some positive effects. Where they have themselves
been assisting well-functioning markets, as in the Nordic countries, they
threaten to be negative. In all cases, however, the refusal of neoliberal
policy to recognise fundamental differences between the market for la-
bour and that for other commodities has had a number of negative con-
sequences. We shall here concentrate on two of these. First has been a
combined failure to address the relationship between consumption and
labour security in economies dependent on mass consumption and to
appreciate how risk and uncertainty have different impacts at different
131
points of the income distribution. Second is a failure to respond to the

social and political impact of the mass migration unleashed by the ad-
mission of new member states in Central and Eastern Europe to the free
market in labour.
Confident consumers but insecure workers
The fundamental position in economic theory that today influences Eu-

ropean labour policy and many individual nation states maintains that,
provided they are not impeded by legal regulation or collective agree-
ments, labour markets will clear, leading to maximum employment and
overall better welfare. If wages or non-wage labour costs fall, or if em-
ployers find it easy to dismiss unwanted workers (either collectively or
individually), employment levels should be expected to rise, providing
higher employment levels than countries in which employees in post
have secure rights, social entitlements and wage levels, but large num-
bers remain without work. True, employment under a flexible regime is
less secure, but the evidence suggests that when job opportunities are
plentiful, workers feel economically secure even if their specific current
job has little formal security (Muffels and Luijckx 2008a, 2008b).
There are, however, certain negative aspects to the pure neoclassical
approach. First, labour markets can take a long time to clear, and since
units of labour are human beings, they experience insecurity and anx-
iety if, while the market is “adjusting”, they suffer falling incomes and
joblessness, without the support of social policy (this having been dis-
mantled in the quest for reduced non-wage labour costs if a neoliberal
programme is being thoroughly pursued). When many workers’ lives
are dogged by insecurity and uncertainty about the future, consider-
ation has to be given to the fact that workers are also consumers, and
that if their working lives are very insecure, they might lack consum-
er confidence. At times of economic recession, flexible labour markets
might provoke a decline in demand, which only worsens the recession.
This problem can be tackled in various ways. (For a detailed discus-
sion of the diversity of strategies available, with evidence on how they
are used in EU countries, the USA, Japan and Russia, see Crouch
2015.) First, if an economy is overwhelmingly dependent on export
trade, domestic consumption might not be important, and the low wag-
es that make it difficult for local workers to consume may be more than
132
compensated by increased international competitiveness. This was

temporarily part of the secret of the West German economic “miracle”
in the early 1950s. The government pursued a tough fiscal strategy
that restrained domestic demand, but the economy recovered from its
wartime destruction through export sales to the USA, the UK, Scandi-
navia and other countries that sustained their own worker-consumers’
demand through Keynesian policies.
A similar approach today has been an important element in the eco-
nomic success of China and some other rapidly developing economies
with vast supplies of surplus labour. It is, however, far more difficult
to pursue this path in parts of the world where the consumption of
the national working population has become important for economic
activity, and/or where widespread democratic rights enable workers to
express their discontent at being unable to afford to consume. This is
particularly the case for post-industrial economies, where many ser-
vices sector activities depend heavily on domestic demand. Whether
WHEN JOB OPPORTUNITIES

ARE PLENTIFUL, WORKERS FEEL
ECONOMICALLY SECURE EVEN IF THEY
HAVE LITTLE JOB SECURITY
these activities comprise public services, dependent on public funding,

or private ones, dependent on private purchases, they find it difficult to
thrive under conditions of austerity policies involving restricted public
spending and low or insecure wages. In such cases, sustained demand
from mass consumers is important to a stable economy.
Another approach to the dilemma, and one that is used in virtually all
advanced economies as well as in less developed ones, is for a minority
of workers—defined perhaps by age, gender or ethnicity, or just by bad
luck—to be excluded from the general security enjoyed by the majority.
The majority have secure jobs and can consume confidently, sustaining a
strong economy, while a minority bears all the burden of insecurity, con-
suming little. This provides a kind of solution, but it is one that leads to a
generation of troubled and troublesome minorities of the socially excluded,
and there must be doubts over its long-term sustainability. The puzzle of
how to have confident consumers who are also insecure workers remains.
The issue is particularly acute where workers with relatively low skills
are concerned. In industrial economies, such workers have the chance
133
to achieve reasonable incomes because their low productivity is im-

proved by the machinery they use. In general, though, with growing
exceptions, low-skill services do not make so much use of technology,
and constant improvements in efficiency reduce the need for low-skilled
workers. Highly skilled services are mainly found in the public sector
or in internationally traded activities. Without thriving local demand
for locally produced services, it is difficult to provide employment for
large numbers of low-skilled people.
IF A RISE IN THE SUPPLY OF SKILLED AND

EDUCATED WORKERS EXCEEDS A RISE IN EMPLOYERS’
DEMAND FOR THEM, THERE CAN BE LAGS IN THE
MOVE TO A HIGH-SKILLED ECONOMY
It is often a central aim of public policy to improve the overall edu-

cational and skill level of the population so that there should be a di-
minishing need to find such employment. However, there will continue
to be a tail of low-skilled workers, for whom the only alternative to
unemployment is likely to be work in local services. Indeed, if a rise in
the supply of skilled and educated workers exceeds a rise in employers’
demand for them, there can be lengthy lags in the move to a high-skilled
economy. This can cause, for some time, a dispiriting increase in the
number of young people having to take low-paid, insecure jobs below
their educational capacity, with a further depressing impact on the
employment prospects of those with low skill.
Faced with these arguments, neoliberals are likely to point to the ex-
ample of the United States of America. Here is a country that has some
of the lowest levels of social protection and unemployment support in
the advanced world, as well as particularly weak employment protection
laws. It is also a post-industrial economy that depends heavily on domes-
tic demand for locally produced services. But it manages to sustain one of
the advanced world’s highest employment rates and bounces back quickly
to those rates after periods of recession. Surely, the US case shows that
social policy is not needed to support a high-performance, high-employ-
ment, high-consuming economy; left by themselves, labour markets will
clear. The US, therefore, served as a major example to imitate when the
OECD and other international organizations, including eventually the EU,
launched their critique of European social and labour policy regimes in
the 1990s (OECD 1994; European Commission 2005).
134
A central aim of public policy is to improve the

educational and skill level of the population.
But the financial crisis of 2007-08 showed that something different

from the capacity of free markets to clear lay behind US employment
success. A large proportion of the US population had been able to sus-
tain the consumption on which the economy depended only by taking on
unsustainable levels of debt: credit card and other forms of consumer
debt. In particular, mortgages of over 100% on houses were taken out,
not to acquire further residential property, but to sustain consumption.
US workers’ wages had been static or slightly falling for several years,
and this had certainly helped to sustain full employment, in contrast
with many Western European countries, where wages had risen at the
expense of the employment of the low-skilled.
But it was consumer debt and high mortgages that had made pos-
sible the paradoxical combination of low, uncertain wages and high,
continuing mass consumption. As became very well known after 2008,
this debt had been sustainable only because it was carried by financial
markets which seemed to have discovered how to trade profitably in
ever larger quantities of risk without negative consequences, but this
eventually came to an extreme stop. A particularly important role had
been played by “sub-prime” mortgages, fundamental to the mainte-
nance of consumption among workers with static wages and insecure
jobs, which financial traders had been buying from each other with no
135
idea of the size of the risks involved. Untradeable uncertainty replaced

tradable risk to an alarming degree, in a crisis from which the world
has yet to recover.
In fact, the OECD and some other authorities had begun to worry
about growing consumer debt, not only in the US but also in the UK,
Ireland, Spain and some other countries, in 2006, two years before the
crash (OECD 2006a). Today, the solution of squaring the circle of flexi-
ble labour and confident consumption through the mechanism of con-
sumer debt seems less attractive, and one hears less of the superiority
of the US (and UK) model. Indeed, the OECD (2011) and International
Monetary Fund (IMF 2012) have gone further and explored another
example of this model that seems unsustainable. The level of income
inequality has been growing rapidly across the advanced economies,
initially and most dramatically in the US. Growing inequality is intrin-
sic to the approach of allowing wages to fall, supported only minimally
by social policy, until the labour market clears. In the case of the US,
where this process has proceeded furthest, the OECD suspects that
consumption among the lower half of the income distribution is now
at risk (Förster et al. 2014), as the wealthiest 0.1% have taken 46.9%
of national economic growth since the 1980s. No other country has
quite the US rate of increase in inequality, though the UK (with 24.3%)
comes second.
These consequences of a threat to consumption embodied in growing
inequality were long concealed by the temporary success of the mar-
kets in consumer debt and sub-prime mortgages, but they have now
been laid bare. The danger now is that governments, seeking to restore
mass consumer confidence but feeling politically unable to challenge
the power of the wealthy by taxing them more, or being unwilling to do
so because of their parties’ financial dependence on wealthy donors,
will gradually encourage a return to the type of financial market that
brought the 2007-08 crisis.
Risk and uncertainty
Viewed in a broader theoretical perspective, we can see the general

issue behind these trends as the problem of uncertainty that must be
faced by populations in all kinds of society. In sophisticated, advanced
economies, the problem is resolved in the following way. The wealthiest,
136
who are in a position to take risks and to pay for professional advice
on how to take those risks intelligently, convert uncertainty into risk
by assigning probabilities to it, therefore making it possible to trade
in it. (This approach to seeing risk as tradable uncertainty was first
developed by Knight (1921).) For them, uncertainty is transformed from
being a threat to life’s security into a means of making money and
acquiring security.
IN SOPHISTICATED, ADVANCED ECONOMIES,

UNCERTAINTY IS TRANSFORMED FROM BEING
A THREAT TO LIFE’S SECURITY INTO A MEANS OF
MAKING MONEY AND ACQUIRING SECURITY
But there is a large residual of uncertainty that is not profitably trad-

able. This is passed on to the majority of the population. Many of these
people, perhaps a majority, are able to hedge against the negative im-
pact of uncertainty by having savings, especially investments in housing,
and by using their skills and luck to secure forms of employment that
are in strong demand. They do not become anything like as rich as the
“financial” minority, but they are reasonably secure.
This leaves a further residuum of uncertainty, which is borne by those
unable to do either of these things. They become the social excluded.
Public social policy sometimes comes to their aid, through systems of
support in periods of extreme insecurity, like unemployment, sickness
or disability and, eventually, old age. But sometimes, even public policy
works in socially exclusive ways, as in the case of some insurance-based
social protection and employment protection laws that help those with
secure jobs, but possibly at the expense of those without.
At a time of rapid economic change like the present long-term wave of
globalization, uncertainty naturally rises. This means that there is more
and more money to be made by those able to convert that uncertainty
into tradable risk, and less and less money for those who receive the
burden of those elements of uncertainty that cannot be traded. Hence,
living standards among the low-paid fall, while those among the wealthy
rise, and inequality grows. The financial system that initially seemed to
bring a larger proportion of the population into successful risk trading
has ended by doing the opposite, contributing to the growth in inequal-
ity that was causing many people have recourse to high levels of debt
in the first place.
137
If the system of labour protection associated with the classic meas-

ures of the industrial past no longer seem to work efficiently, and if
the Anglo-American combination of labour market flexibility with con-
sumer debt has brought disaster, to what other models can we turn?
During the early years of the present century, the EU took great inter-
est in new policies being developed in Denmark and the Netherlands,
whereby workers sacrificed certain older forms of legal job protection
in exchange for improved help with finding work when unemployed,
improved training and education, publicly funded childcare to make
it easier for mothers to work and other measures for improving the
employability of the working population.
“FLEXICURITY” WAS A GOOD

EXAMPLE OF HOW EUROPEAN POLICY
CAN COMBINE MARKET-MAKING
WITH SOCIAL POLICY
Security of the old kind, security in a specific job, could no longer be

guaranteed in a rapidly changing economy, but workers wanted to be
able to feel confident that public policy was there to help them find, if
necessary, a succession of jobs. Employment security could replace job
security. It should be noted here, though it will be discussed further
below, that there is an important difference between job security and
employment security. The former refers to a worker’s confidence that
he or she can retain a specific post, while employment security includes
the former and the alternative solution of being able quickly to find an
alternative if a specific post is lost.
This was expected to produce a combination of flexibility and a sense
of security, and was dubbed “flexicurity” (Bredgaard et al. 2007, 2008;
European Commission 2007; Jørgensen and Madsen 2007). It was a
good example of how European policy can combine market-making with
social policy in a constructive compromise. The outcome might resem-
ble that of the Anglo-American approach, but with support from public
policy as well as from the market.
Denmark and the Netherlands had been striking cases of success in
achieving high employment levels and economic efficiency after some
years of crisis—and Denmark, in particular, avoids the high levels of
income inequality associated with the USA. The most outstanding feature
of the Dutch success was the achievement of a high level of employment
138
among women, mainly through the facilitation of part-time work, in-

cluding granting part-time workers many of the entitlements and rights
of full-timers.
The Danish example provided different lessons. The country had re-
duced its previously very high levels of legal job protection, but was
the highest spender on active labour market policy (ALMP), includ-
ing both job-related education and the provision of child care. This
became the paradigm case for flexicurity. Muffels et al. (2013a, 2013b,
2014) found that high average unemployment replacement pay (URR)
over a five-year period had a small positive effect on employment, even
after taking account of the business cycle and demographic controls.
They speculate that this might be associated with the positive effect of
unemployment insurance on improving job match and on stabilizing
consumption, supporting claims made on behalf of flexicurity theory
for secure and enabling benefits. However, the authors also point to the
positive association between URR and involuntary job mobility (dis-
missals), suggesting that in countries with strong income protection,
employers tend to shift the costs of economic adjustment to the gov-
ernment, knowing that employees are well covered.
Muffels et al. (2013a, 2013b) also found that both ALMP spending and
the level of encompassment of collective bargaining had a positive effect
on employment. This has also been found in research on the crisis by the
OECD (2013a) and is consistent with the findings of our present study.
However, in Muffels et al. (2014), the positive effect of ALMP seemed to
be restricted to Western Europe; it turned strongly negative when ap-
plied to CEE countries—though ALMP is in general far weaker in CEE
than in the West. The effect of ALMP on employment seemed strongly
dependent on the content and design of ALMP in the various countries.
Training and working-time arrangements appeared particularly suc-
cessful to curtail unemployment in the recent crisis, but particularly in
countries with a strong tradition in these policies. In other countries,
such as France, Italy and the Netherlands, during the crisis, reform
proposals were launched aimed at increasing flexibility through reduc-
ing the protection of insiders while enhancing security by improving
the protection of outsiders. Overall, the authors concluded from these
findings that welfare state regimes, or social models, seemed to matter
in terms of the way in which institutions influence employment perfor-
mance, but that each regime sought its own way in which to reform its
policies in response to a crisis.
139
The Netherlands has been a notable case of

success in achieving a high employment rate.
From both Denmark and the Netherlands, the EU took the idea of
a strong role for public social policy, running alongside a reduction in
classic job protection (European Commission 2007). It then began to
urge the idea of flexicurity on all member states. However, given the
nature of the open method of coordination, countries were left very free
to interpret the idea of flexicurity.
The Commission also over-simplified the Danish system. Denmark not
only has advanced active labour market and childcare policies, but also
has exceptionally generous levels of unemployment support for workers
who lose their jobs and strong trade unions representing a high pro-
portion of the workforce (Bredgaard et al. 2008; Madsen 2009). Both of
these features, neglected by the Commission and many other observers,
contributed to flexicurity. Generous unemployment pay meant that the
consequences of losing one’s job were less severe than in many other
countries. The existence of strong unions meant that workers did not
need to fear that a low level of job protection rights would leave them
exposed to managerial bullying and arbitrariness, as the union would
intervene in such cases. It is true that levels of both unemployment
support and union membership have declined in Denmark in recent
years, but they both remain among the highest in the world.
What happened in this one-sided selection of elements of the Danish sys-
tem was a concentration by the Commission’s experts on what had come
140
to be known as the “new social risks” and a neglect of “old social risks”.
This distinction can be traced back to a certain interpretation of risk by
the late Ulrich Beck (1986) on what he saw as a change in the nature of
risk in advanced societies. Where risk in pre-industrial and industrial
societies (or what Beck preferred to call “the first modern”) had been a
source of worry and concern for ordinary working people, in post-indus-
trial societies (“the second modern”), risk was a matter of opportunities.
This idea was developed by Anthony Giddens (1994, 1998), David Tay-
lor-Gooby (2004) and some other mainly British authors to argue for a
shift in social policy. In industrial societies, they argued, there were old
social risks associated with dangers to security that people confronted
passively: risks of unemployment, sickness, accident and disability and
prolonged old age. Confronting these risks with transfer payments was
the role of classic 20th century social policy.
Today’s working population confronted opportunities that they could
tackle actively, given appropriate help from social policy. This led to the
case for a “social investment welfare state”. The working population of
the second modern needed education and training, help with finding
appropriate new jobs and new training as technological advances made
it necessary to change employment, and help with child care to make
possible a two-gender workforce. These constituted the new social risks,
policies that were mainly a matter of providing services rather than
transfer payments.
The old risks were seen as declining in importance in the confident,
reliably expanding economies of high-technology, post-industrial socie-
ties. Given, therefore, a reduced need for money to be spent on dealing
with the old risks, funds could be diverted to the new ones without a
net increase in costs. Also, given the predominance of women among
the employees of public services in nearly all countries, the shift from
transfer payments to service provision would in itself assist the growth
of the two-gender workforce (Esping-Andersen 1999).
There was much good sense in these arguments, and economies that
confronted the new social risks enjoyed greater success in terms of pro-
duction, innovation and employment levels than those that did not. In
particular, the Nordic economies, with their high levels of spending on
public services, performed better than those in South-Western Europe,
with welfare states concentrated on transfer payments. This was partly
due to the superior ability of the former to employ women, who became
the main employed providers of these new expanded services.
141
Some of this thinking clearly influenced the Commission’s interpre-

tation of the Danish model, which stressed the new social risk aspects
of ALMP and childcare and played down generous unemployment pay
and strong unions — both associated with old social policy. But it was
an error to ignore the fact that Danish policy operated on old and new
social risks alike. After 2008, the error has become particularly clear.
The old social risks have not gone away. Unregulated, unsustainable
financial markets gave the impression that the laws of supply and de-
mand had lost their force and that we had embarked on an age of lim-
itless expansion, but that was all illusion.
Beck’s analysis of a change in the nature of risk would have been
better expressed in terms of the economist’s distinction between un-
certainty and risk discussed above, rather than as one between first
and second moderns. What Beck had seen as negative risks associated
with pre- and industrial societies were not risks but the phenomenon
of uncertainty, in which people have been unable to assign probabilities,
convert uncertainty into risk and then trade in it. His idea of new risks
was the true concept of risk, but he was wrong to have seen modern
populations in general as having a capacity to convert uncertainty into
risk. As noted above, only those with wealth and access to professional
advice could afford to do this in a highly successful way. If the bulk of
the population in many countries seemed to have joined this risk market
during the early 21st century, it was mainly because their consumer and
mortgage debt was taken up by speculative traders. When the unstable
financial system that had made this possible collapsed, many of these
people were left with the untradeable uncertainty, from which, in truth,
they had never really escaped.
In a further twist, governments across the world moved quickly to
bail out the banks within which the market traders had worked, as they
feared the consequences of a collapse of the global financial system.
Accustomed to profiting from turning uncertainty into tradable risk,
banks (and the incomes of highly paid traders) were protected from
bearing the losses that should logically have followed when their risk
calculations failed. In the long run, this will probably favour a return
to irresponsible trading, as bankers have learned that states will bail
them out from irresponsible risk trading. In addition, they can be ex-
pected to use their considerable lobbying power to seek a reduction of
the protections against such behaviour that governments and the EU
have been erecting since 2008.
142
More immediately, these actions by governments shifted the burden

of debt onto themselves, thereby turning a crisis of private debt into
one of public debt. This has had the further consequence of leading
governments to ease their debt problem by cutting public expenditure.
The main impact of this has been on the poor, who depend more than
most on social spending. Thus, once again, if risk cannot be traded, it is
converted back into untradeable uncertainty, which is dumped on those
at the bottom of the income distribution. If the growth of the new risk
markets produced increasing inequality, their collapse has intensified
rather than reversed the trend.
IF RISK CANNOT BE TRADED, IT IS CONVERTED

BACK INTO UNTRADEABLE UNCERTAINTY, WHICH IS
DUMPED ON THOSE AT THE BOTTOM
OF THE INCOME DISTRIBUTION
In a further reinforcement of these processes, the fact that a private

debt crisis became a public one strengthened (falsely but effectively)
the arguments of those both in the EU and in national governments in
Europe and elsewhere, who reasoned that social spending had in any
case become too high, and that both it and other forms of social policy
that seemed to impede free markets needed to be restrained. But the
crisis really demonstrates exactly the opposite: people without great
wealth need protection against both old and new social risks—a com-
bined protection that they receive, though decreasingly, in the Danish,
other Nordic and some other North-Western European systems. There
is little trade-off between old and new risks; they are cumulative. Only
populations willing to support with taxes a high level of social expendi-
ture to confront both kinds of risk are able to combine labour flexibility
with confident mass consumers, a relatively low level of inequality and
economic success.
The most recent developments in ideas from social policy experts
for a social investment welfare state fully recognize the need for an
approach to consolidated social risks (Hemerijck 2012; Vandenbroucke
et al. 2011). However, they have so far had no influence on policymakers.
Not only did the Commission and others fail to perceive the attributes
of true flexicurity in the Danish case, but in subsequent years, although
they have continued to talk in vague general terms about flexicurity,
in practice they have returned to the uncompromising model of the
143
neoliberal labour market—a model from which the OECD (2006b) be-
gan to distance itself some years ago (see also Esping-Andersen and
Regini 2000; Avdagic 2015).
In its recommendations to the debtor nations in South-Western Eu-
rope and Ireland, the Commission has advocated only the dismantling of
old forms of social protection and the weakening of collective bargaining
(and hence of trade unions). There has been no attempt to encourage
replacement of these institutions with those of the new social risks
school, let alone the combination of old and new policy that seems to
be required for an optimally functioning labour market. This is seen
at its clearest in the Commission’s joint Memorandum of 2012 with
the European Central Bank and the International Monetary Fund to
Greece (Government of Greece 2012), as this spells out in particular
detail the policy preferences of an uncompromising neoliberal regime.
The revised memorandum of 2015 is less singularly neoliberal in its
insistence on a more egalitarian fiscal regime, but the stance on social
policy has not changed.
Trade unions and, to some extent, employers in the Nordic countries
resent the de facto rejection of their highly successful labour market
regimes, resulting from the a priori assumption of EU policy that only
a neoliberal market order can function efficiently. This is leading to
demands for a “renationalization” of employment and labour policy in
that part of the world and among other observers critical of current EU
developments (Streeck 2013). This is understandable in the context of
what has been happening, but short-sighted. It is very difficult to pro-
tect the national labour-market institutions of individual countries in a
globalizing economy. There is constant pressure in that environment to
move to lowest-cost models that deliver the highest short-term profit.
The EU does not drive this process, which is no way limited to its mem-
bers. Critics can argue that the EU should be a level of creative response
to it rather than, as it is increasingly becoming, simply one of its facil-
itators, but the call for a renationalization of social policy is Quixotic.
It is often not possible to judge in advance which aspects of economic
systems are likely to deliver economic success, but in the short term,
there is pressure to impose uniformity. Intense competition drives out
diversity. We have seen this played out in the financial system. First,
the Anglo-American system deregulated itself and was stripped down
to the goal of short-term profit maximization. It was then advocated
as a superior system to the rest of the world, and systems of corporate
144
governance and corporate accounting were rewritten to conform to it.

By the time it became clear that short-term profitability could accom-
pany long-term non-sustainability, it was too late to save the world from
a financial collapse.
At the same time, unions and their associated parties in South-West-
ern Europe are tempted to seek a return to their former social policy
regimes, even though these have usually been associated systems of
legal job protection that increasingly benefit just a minority of the work
force, excluding many of the lowest paid, and (with the exception of
France) result in high levels of inequality in the distribution of social
benefits. Understandable though their rejection of neoliberal strategy
may be, their own approach brings no solution and arguably makes
everything worse.
Whether the national system being defended is a totally viable one
compatible with universalism, egalitarianism and a high-performing
economy, or one that is economically less viable and associated with
unequal access to the social state, no solution can be found by pitting
national social achievements against EU neoliberalism. Also, and par-
ticularly but not solely within the Eurozone, when labour markets func-
tion poorly in an individual country, the consequences impact others.
Although labour market issues were not the main cause of the Southern
European debt crisis, they are implicated and cannot be ignored. The
idea that EU policy does not need to touch national labour market and
social policy is difficult to sustain. By the same token, however, if Europe
offers only strict neoliberalism, denying the success of the Nordic and
some other economies and offering nothing but increased insecurity to
workers in South-Western ones, it will become increasingly difficult to
resist the pressure for renationalization.
The impact of immigration
Particularly important among the problems of allowing labour markets

to “clear” through unimpeded competition are those relating to mass
migration. For labour markets to clear where there is migration from
countries with considerably lower living standards, the wages of “na-
tive” workers in the countries receiving immigrants might have to fall
a long way. The neoliberal answer is that in the long term, wages will
rise in the labour-exporting countries as their economies improve and
145
extensive emigration produces labour shortages. Meanwhile, wages will

fall in the countries of immigration, reducing the incentive for workers
in the countries of emigration to move. In the end, migration is reduced
to small flows in both directions, and the problem disappears.
Certainly, in the long run, such a reduction in cross-national inequal-
ities would be a desirable outcome, and eventually it will probably hap-
pen. But the long term could be very long indeed, and the process of
gradually declining wages in the countries of immigration is already
creating insecurity and anxiety, leading to social disturbance, xenopho-
bia and pressure for the restriction of immigration. Immigrant commu-
nities, which can usually be distinguished as culturally and linguistically
“different”, are becoming vulnerable to persecution and violence. These
problems are beyond the reach of economic theory; fear and anxiety
leading to xenophobia and ethnic conflict are externalities to which
the theory has only one answer: wait patiently for long enough and the
market will clear.
National welfare states have been built on the basis of shared citizen-
ship: we recognise each other as members of a national community and
accept obligations to support each other within that community (provided
we can see that others are also trying to make a contribution). Extend-
ing that idea to a small number of immigrants worked with some, but
relatively minor, difficulty in several European countries (especially in
the Netherlands and the UK). But as the number of immigrants grows,
that generosity of spirit can become strained, and that is what is hap-
pening now.
It is necessary to distinguish between three types of immigration
affecting European countries. First is immigration from former col-
onies or parts of the world with which a country has had a historical
association. This was of major importance for people from the former
empires of Western European nations in the first three post-war dec-
ades, a process that continues. But it is particularly prominent today
for Spain and for some countries in Central and Eastern Europe with
borders with non-EU but fellow-Slav states. These issues are specific
to the countries concerned and probably have to be resolved by them,
in partnership with the countries of emigration.
Second is migration from the new member states into the countries
of Western Europe. This is where EU neoliberalism has been so blind.
Since, for neoliberal economists, welfare states achieve nothing and
human beings do not need to be considered as anything other than
146
units of labour power, there was no need to consider the implications

of relations between native populations called upon to extend benefits
of their welfare states, which have been important badges of their citi-
zenship, and immigrants making even modest demands on those states.
However, if we accept the concept of social citizenship as something
meaningful that affects people’s behaviour, we should be able to see that
if migration is taking place under the umbrella of EU membership, then
a degree of social citizenship at that level is also necessary.
NATIONAL WELFARE STATES

HAVE BEEN BUILT ON THE BASIS OF SHARED
CITIZENSHIP: WE ACCEPT OBLIGATIONS
TO SUPPORT EACH OTHER
If the citizens of countries receiving large numbers of immigrants

are to be reassured that the integrity of the contributory base of their
welfare states is intact, those national systems should not have to bear
the burden of immigrants’ use of social services and transfer payments
until those immigrants have started to make a contribution through
work and taxation. Further, if the people of all Europe are to see them-
selves as European citizens, there needs to be a level of welfare state
that operates at the EU level.
If Europe is no more than a group of markets, including a labour mar-
ket, there is no reason why the citizens of individual countries should
accept any obligations towards immigrants in their midst. This calls
for a level of basic social entitlements to which Europeans should have
access whenever they are living in an EU member state other than their
own and are in need of social support. These entitlements should be
funded by contributions from all member states, based on a formula
that links national wealth and a country’s number of emigrants. Access
to citizenship services by an immigrant should at first be funded by calls
on that fund by the receiving state, being gradually replaced by purely
national funding as the immigrant makes a contribution within his or
her new country.
Finally come immigrants who are really asylum seekers, fleeing war,
famine, persecution or other disasters in countries outside Europe.
These comprise a growing share of cross-national movements of people,
especially for Germany, Austria and the Nordic countries, but also for
Greece and Italy, often the first ports of call for people escaping some
147
of the world’s most troubled places in North Africa and the Middle
East. Even more than with EU migrants, these movements are caus-
ing stress in the receiving countries, again undermining the solidarity
of the welfare state. But it is usually impossible, or extremely callous,
to solve the problem by simply sending the people back to the places
from which they are escaping. However, if the countries of Western
Europe, North America and elsewhere are to be expected to play this
kind of role in receiving the world’s distressed, there again needs to be
an international fund, in this case operated at the level of the United
Nations, of the kind proposed here for EU member states, though at a
less generous level, since membership of the UN does not involve the
same obligations as that of the EU.
It would be wrong to pretend that this kind of approach could solve
all the problems presented by immigration, especially illegal immigra-
tion that is not part of labour market policy. There are problems here
of the relations between some forms of Islam and other parts of the
world, including fears and the reality of terrorism, which are beyond
our present scope. However, these issues are affecting labour markets
because they are exacerbating existing tensions between host and im-
migrant populations. Labour market policy, therefore, has to recognise
the questions involved and, for its own sake, play whatever part it can in
ameliorating those tensions. This mainly includes alleviating anxieties
about labour market insecurity.
Conclusions
Overall, these developments point to a need to strengthen the European

level of labour-market policy-making, but with a broader, more imagina-
tive and politically more diverse set of policy instruments than current
EU policy biases allow. This requires moving beyond a neoliberal per-
spective and taking account of a wider range of values. The problem is
that European—as well as many national—policymakers seem unwilling
to embrace these wider perspectives. Instead, therefore, we are being
trapped into a cycle of damaging approaches whereby intensifying la-
bour insecurity is one of the causes of growing income inequality, which
in turn creates consumption problems for large numbers of citizens,
driving them to take more and more household debt, and separately
reinforcing xenophobia. If EU labour and social policy continues on its
148
present track, further Europeanization will be an unmitigated disaster.

But responding to that prospect with a renationalization of this policy
area will simply fail under the pressures of globalization.
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149
CO N T R ASTS I N EURO P E’S I NVE STM E NT AND PR ODU CTIVITY PER FOR MA N CE
BART VAN ARK is Executive This paper documents two gaps in Europe’s
Vice President, Chief Economist
growth performance since 2008 and 2009.
and Chief Strategy Officer of the
research center The Conference The first refers to the slower output, invest-
Board. He is a full professor at the ment and productivity growth rate compared
University of Groningen, special-
ized in economic growth, develop- to the pre-crisis period. The second refers to
ment economics, economic history the performance gap relative to the United
and international economics and
business. He consulted for the States. Weak productivity growth is a major
European Commission and the factor slowing the speed of recovery in Eu-
OECD and has published in the
Journal of Economic Perspectives, rope. This slowdown has broadened from the
Brookings Papers on Economic Ac- services sector to manufacturing, which has
tivity, and Economic Policy. He is a
Director at the National Bureau of been a traditional stronghold for productivity
Economic Research and a mem- in Europe. There is a need to accelerate
ber of the Board of Directors of
The Demand Institute. investment in the most important assets for
productivity recovery.
150
CONTRASTS IN EUROPE’S
INVESTMENT AND PRODUCTIVITY
PERFORMANCE*
Introduction
The economic and financial crisis which started in 2008-09 has thrown
the European economy into a ‘‘double-dip’’ recession and overall stag-
nant growth for a lengthy period of time. The region now faces two
significant gaps in its growth performance. The first is a gap relative
to its own pre-crisis growth performance. The second is a worsening
of a pre-crisis performance gap relative to the US economy, despite the
latter’s own challenges to revive since the Great Recession.
EUROPE NOW FACES A SIGNIFICANT GAP

IN ITS GROWTH PERFORMANCE IN CONTRAST
WITH THAT OF PRE-CRISIS YEARS, AND A WORSENING
OF THE GAP IN RELATION TO THE US ECONOMY
Europe’s growth shortfall from both perspectives is very visible at the

aggregate level of GDP. In 1980, the level of GDP of what constitutes
the EU-28 today was 45 percent above that of the United States, but it
gradually narrowed to about 10 percent just before the 2008-09 crisis
(see chart 1). By 2014, GDP in Europe was only 6 percent above the US
level. GDP performance for the Euro Area has weakened even more,
relative to the US. In 1995, the level of GDP of what is the Euro Area-19
today was about 10 percent lower than the US level, but the gap was as
big as 25 percent in 2014.
* T
he Conference Board and University of Groningen. This contribution is in part based
on a research paper for the European Commission, DG ECFIN, titled “From Mind the
Gap to Closing the Gap: Avenues to Reverse Stagnation in Europe through Investment
and Productivity Growth,” European Economy Fellowship Initiative 2014-2015, Discus-
sion Paper 006, September 2015; and on a recent paper co-authored with Mary O’Maho-
ny, titled “Productivity Growth in Europe Before and Since the 2008/09 Economic and
Financial Crisis,” in The World Economy: Growth or Stagnation? Edited by D.W. Jorgen-
son, K. Fukao and M.P. Timmer. Cambridge University Press, 2016.
151
The weaker output performance in Europe is also reflected in a larger

per capita income gap relative to the United States. For example, per
capita income in the Euro Area-19 hovered between 75 and 80 percent
of the United States level between 1980 and 1995. However, after 1995,
it dropped below 75 percent of that same level, then briefly recovered
during cyclical upswing around 2005 to 2006, and has yet dropped
further since the crisis, especially since 2011, to only 71 percent in year
2014 (see chart 2).
Compared to per capita income, productivity showed a very different
pattern relative to the United States. Between 1980 and 1995, per capita
income in the Euro Area was supported by a rapid closing of the gap in
output per hour from 85 percent of the US level to more than 95 per-
cent. During this period, productivity was driven by increased capital
intensity while employment growth was quite slow. Between 1995 and
the start of the 2008-09 crisis, employment growth in Europe improved,
but weaker productivity performance increased the gap in per capita
income relative to the United States.
Chart 1. Level of GDP in trillions of $US as of 2014 (PPP-converted), 1980-2014
152
Since the onset of the crisis, the American and most European econo-
mies experienced a drastic decline in both employment and productivity
growth, creating a gap relative to their own pre-recession performance.
While employment has begun to recover, there have been virtually no
signs of a significant recovery in productivity growth beyond some
short-lived, pro-cyclical improvements in 2010. Productivity growth,
in fact, weakened substantially in both economies, and as a result, the
productivity gap in terms of output per hour between Europe and the
United States has remained largely unchanged since 2009. Per capita
income dropped off further because of much weaker output recovery
in Europe.
In this contribution, I argue that weak productivity growth is a major
factor slowing the speed of growth recovery in Europe. We also find that
the productivity growth slowdown has broadened from the services
sector to manufacturing, which has been a traditional stronghold for
productivity in Europe. These trends are all the more surprising, as the
productivity slowdown seems to happen during a time of a rapid rise
Chart 2. Level of per capita income and labour productivity in the Euro Area relative to
the United States (PPP-converted), USA=1.00, 1980-2014
153
of the digital economy. While the lack of demand since the onset of the
crisis has held back the potential to improve productivity, the lack of
investment in the most important assets for a productivity recovery,
namely the intangible (or knowledge) assets in the economy, is a key
factor as well. In addition to ICT capital, the intangibles include other
information assets, such as data, innovative property and economic
competencies, including workforce training, organizational innovations,
branding and marketing. In the light of slowing labour supply across
WEAK PRODUCTIVITY GROWTH

IS A MAJOR FACTOR SLOWING THE SPEED
OF GROWTH RECOVERY IN EUROPE
European economies in the coming decades, I argue that the key to

supporting growth in Europe is to strengthen productivity by comple-
menting physical (tangible) assets in the economy with intangible assets
that drive technological change and innovation.
An analysis of the sources of growth
A decomposition of the annual average growth rates in aggregate GDP

into the contributions of labour, capital and TFP reveals some stark
differences in Europe’s growth performance relative to its own history
and compared to the United States (see table 1). Although, from 1999
to 2007, Europe and the Euro Area saw a faster increase in the contri-
bution of working hours to growth than the United States, hours have
contributed negatively since the beginning of the crisis in Europe and
have provided a zero contribution in the United States.
The contribution of past and present investments, measured as capital
services from ICT and non-ICT assets, have been the main drivers of GDP
growth in the aggregate EU and the US. Before the crisis, non-ICT capital
accounted for about 0.8 percentage points of GDP growth in the EU, but
it has declined to 0.5 percentage points since the crisis. In the Euro Area,
the contribution of non-ICT capital dropped from 0.7 to 0.3 percentage
points, which was comparable to the drop-off in the United States.
The US advance in the ICT capital contribution to growth was much
higher (at 0.7 percentage points) than in Europe (at 0.5 percentage
points) and the Euro Area (at 0.4 percentage points) during the 1995
154
to 2007 period. In the US, much of the faster investment pace during
the ‘‘new economy’’ era of the late 1990s was driven by the scale ef-
fects from larger US markets, especially in market services, such as
trade and transportation, which could not be easily replicated in Eu-
rope (Inklaar et al. 2008). Since 2008, the ICT capital contribution to
Table 1. Output, Hours and Labour Productivity Growth, and Growth Contributions by
Major Input, log growth, 1999-2007 and 2008-2014
155
growth slowed down considerably in both regions, and slightly more in

the United States (from 0.7 to 0.4 percentage points) than in the EU-28
(from 0.5 to 0.3) and in the Euro Area (from 0.4 to 0.3).
The biggest concern with regard to Europe’s growth rate relates to
the slow rate of total factor productivity (TFP) growth, which measures
the efficiency of the combined use of labour and capital. As mentioned
above, this trend is all the more surprising given the rapid rise of dig-
ital technology in the past decade. The slowing trend in TFP growth
can be explained in different ways. Beyond the temporary impact from
the recession related to weak cyclical demand, slow total factor pro-
ductivity growth might signal weakening innovation and technological
change. Companies may be holding back investment in those areas due
to longer term concerns about a negative spiral of weak demand and
investment, in which low nominal interest rates do not help to drive up
investment—the so-called secular stagnation hypothesis.1
However, slow total factor productivity growth may also be caused
by difficulties on the supply side to implement new technologies. It is a
well-known fact that new technology regimes, such as the current con-
vergence of ubiquitous broadband and mobile, supported by cloud com-
puting and big data analytics and reflected in the rise of apps economy
and the sharing economy, take time to translate themselves into more
productivity applications. In the extreme, a minority of scholars argue
that the potential impacts of this latest digital technology wave fade in
comparison to previous major technology booms, such as the electricity
grid or the combustion engine.2 More likely, it could be that the impact
of new technologies is delayed, for example, due to a shortage of skilled
workers, a lack of organizational innovations or other factors.
But for the total factor productivity growth rate to turn negative,
additional explanations are needed. First, it could signal an increase
in rigidities in labour, product and capital markets during the crisis,
causing increased misallocation of resources, away from higher-pro-
ductivity to lower-productive firms. This may especially be so in times
during which scale-dependent technologies, such as communication
1 S
ee, for example, C. Teulings, and R. Baldwin (2014), “Secular Stagnation: Facts, Causes
and Cures,” VoxEU, Centre for Economic Policy Research, London.
2 See, for example, Robert J. Gordon, “US Productivity Growth: The Slowdown Has Re-
turned after a Temporary Revival,” International Productivity Monitor 25, Spring 2013;
Tyler Cowen, The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern
History, Got Sick, and Will (Eventually) Feel Better, (New York: Dutton Adult), 2011.
156
technology, require flexibility across a larger economic space. Limited

scale effects in Europe, related to fragmented markets and limited im-
pacts from ICT utilization, might have played a larger role than in the
United States.
Second, we can also not exclude the possibility that measurement
issues hide the productivity impacts related to the introduction of new
technologies and subsequent innovations. The potential productivity
gains from the rise of the digital economy pose huge measurement
challenges. Inadequate price measures, a failure to measure consumer
surplus and, importantly, the inadequate reflection of the productivity
gains from the apps economy in the output statistics may cause a poten-
tial downward bias in the output measures. However, the lack of proper
investment measures reflecting the so-called intangible assets, such as
human capital, information assets, innovative property and economic
competencies, add to the complexity of measurement issues. In any
case, from the perspective of understanding the growth gap across the
Atlantic, it is unlikely that the measurement bias in technology is any
bigger in Europe than it is in the United States.3
An industry perspective on the

productivity slowdown in Europe
When looking at Europe’s productivity performance from an industry

perspective, a striking difference can be observed. Before the crisis, Eu-
rope was a productivity strong hold in the manufacturing sector (exclud-
ing ICT production), but a much weaker performer in ICT products and
services and more generally the author’s in the market services sector.4
Since the crisis, however, Europe has also lost its productivity advantage
in non-ICT manufacturing. Table 2 presents the average yearly growth
rates of labour productivity for the combination of eight major Euro Area
economies, the United Kingdom and the United States, for 1999-2007
and 2008-2013.
3 F
or a recent commentary, see the author’s blog post, titled “Blaming the productivity
slowdown on measurement issues takes our eyes off the ball”.
4 See B. van Ark, M. O’Mahony and M.P. Timmer, “The Productivity Gap between Europe
and the U.S.: Trends and Causes”, Journal of Economic Perspectives, Vol. 22 (1), Winter 2008,
pp. 25-44. And M.P. Timmer, R. Inklaar, M. O’Mahony and Bart van Ark, Economic Growth in
Europe. A Comparative Industry Perspective, Cambridge University Press, 2010.
157
The productivity measures are divided between three main sectors.5

Firms in the ICT goods and services sector often experience very strong
productivity gains. Even though ICT-producing firms only represent a
small part of the economy (about 8 percent of total GDP in Europe), they
accounted for a much larger share of productivity growth in the market
sector.6 Before the onset of the crisis, US labour productivity in the ICT
sector grew at 10.5 percent vis-à-vis 4.4 percent per year in Europe. Only
Finland posted productivity growth rates in the same range as the US,
whereas in other Euro Area countries, productivity growth rates in ICT
production were mostly less than half of that. Even though European coun-
tries continued to grow employment in the ICT sector after the emergence
of the crisis, productivity growth stayed well behind the US, although the
latter’s economy also saw productivity growth in the ICT sector halved—
even though a downward measurement bias could play a role here.
In the goods producing sector, which mainly comprises manufacturing
(excluding ICT), but also agriculture, mining, utilities and construction,
productivity growth was higher than in the US in seven of the nine
European economies (except for Italy and Spain) before the crisis. The
average growth rate of labour productivity in the Euro Area goods pro-
duction sector was 1.9 percent from 1999 to 2007 versus 1.7 percent in
the United States.
Clearly, the differences in goods productivity performance reflect the
specialization of goods production. For example, the US and Nordic econ-
omies strongly concentrated in high-tech ICT sectors (which are separate
from the estimates for the goods producing sector). In contrast, Europe-
an continental economies saw a broader range of specializations across
manufacturing sectors, such as Germany’s stronghold in investment
goods and high-end specialized manufactured products, France’s spe-
cialization in infrastructure and transportation equipment, and Belgium
and the Netherlands’ concentration on chemical and related industries.
5 T
he analysis does not include non-market services, which comprise education, health
care, public administration and real estate services. Measurement problems with re-
gard to output in non-market services are large, and, therefore, we refrain from showing
those separately. Real estate activities are also included with non-market services, as
the output measure includes imputed rents on owner-occupied dwellings, making the
interpretation of the productivity measure problematic.
6 See Corrado, C. and K. Jäger (2014), Communication Networks, ICT and Productivity
Growth in Europe, Economics Program Working Paper #14-04, The Conference Board,
New York.
158
In the early aftermath of the recession, labour productivity growth

for European goods producing sectors dropped off significantly to 0.5
percent from 2008 to 2012, to a large extent because of the cyclical
impact which typically hits tradeable goods harder than less-trade-
able services, and fell slightly below the US growth rate (at 0.7 per-
cent) for the same period. With the exception of Spain, none of the
European economies saw faster productivity growth than the US in
goods production (even excluding ICT) after 2008. The more moder-
ate decline in US productivity growth was largely achieved by a rapid
layoff of manufacturing and construction workers. In most European
Table 2. Output per Hour by Major Sector in percentages, 1999-2007 and 2008-2013
159
countries, employment growth rates did not decline as much, with

the notable exception of Spain and Italy where they fell dramatically.
In several countries, in particular Germany, temporary employment
subsidy programs supported labour hoarding in manufacturing. More
recent estimates of manufacturing output show that the cyclical re-
covery effects on manufacturing have largely played out. Still, by 2014,
manufacturing value added levels in Europe were still below the pre
2008 level, raising the question of whether Europe will successfully
THE DIFFERENCES IN GOODS PRODUCTIVITY

PERFORMANCE REFLECT THE SPECIALIZATION
OF GOODS PRODUCTION
reestablish its earlier dominant position as a top performing region

in world manufacturing.
The market services sector, which includes distribution, financial,
business and personal services, but excludes ICT services, showed the
opposite in relative productivity performance compared to goods pro-
duction. On average, labour productivity growth in market services
was 0.7 percent for the eight Euro Area economies from 1999 to 2007,
well below the 1.9 percent in the goods producing sector. In the US, we
saw the opposite, with market services productivity at 2.1 percent from
1999 to 2007, ahead of the 1.7 percent labour productivity growth rate
in goods production (excluding ICT) (see table 2).
The weak productivity performance in market services (excluding
ICT) has been extensively documented in our earlier work (see footnote
5), but it has significantly worsened since the crisis—although it weak-
ened in the US as well, dropping to a negative -0.1 percent from 2008 to
2013. In earlier work, we stressed particularly large productivity short-
falls relative to the US in trade and transportation sectors in Europe.7
Smaller productivity effects from investment in ICT in those sectors
seemed to have played a large role. Factors related to market structure,
competition and lack of a European single market for services added
to the perils of Europe’s productivity performance in market services.
Overall, the sectoral growth accounts for why European countries show
considerable declines in labour productivity and TFP growth across the
board over the past two decades, even though productivity in goods
7 See footnote 5 for references.
160
production (excluding ICT) has remained relatively strong compared to

market services. However, the distinction between goods and services,
and more specifically between manufacturing and business services, is
increasingly artificial. The two types of activities are increasingly in-
tegrated, especially in advanced economies, such as Europe and the
United States, where the services’ share in production of manufactured
goods has been rapidly increasing. For example, both Europe and the
United States increased its real income obtained from manufacturing
production, not only through more competitive manufacturing activity in
Europe, but especially through an increase in the contribution of service
sector activities to the global value chain of manufactured products.8
While the number of workers in the manufacturing sector in the old
EU-15 member states producing for global manufacturing declined from
21.2 million workers in 1995 to about 18.5 million in 2008, the number
of workers in non-manufacturing industries involved with foreign pro-
duction rose from 13.5 million workers in 1995 to 16.5 million in 2008.
Over the same period, the United States lost workers for foreign man-
ufacturing production in both sectors between 1995 and 2008. Hence,
for Europe to compete in the global economy, one needs to widen the
perspective from manufacturing productivity to services sector pro-
ductivity as well (see chart 3).
The role of intangible investments in the diffusion of new technologies
Technological progress and innovation have an impact on productivity

directly, through growth of the ICT sector, for example, and indirectly,
through the adoption of those technologies across the economy. In par-
ticular, the latter effect, which may be referred to as the diffusion effect,
should not be considered in isolation from a broad concept of investment
beyond machinery and equipment. In recent years, important literature
has emerged, highlighting that organisational changes and other forms
of intangible investment are necessary to gain significant productivity
benefits from using ICT.9
8 S ee, for example, M.P. Timmer, A.A. Erumban, B. Los, R. Stehrer, and G. J. de Vries,
Slicing Up Global Value Chains," Journal of Economic Perspectives, 28(2): 99-118, 2014.
9 See, for example, M.P. Timmer, A.A. Erumban, B. Los, R. Stehrer, and G. J. de Vries,
“Slicing Up Global Value Chains”, Journal of Economic Perspectives, 28(2): 99-118, 2014.
161
Incorporating non-technological innovations (design and financial

innovations), workforce training, improvements in organizational
structures, marketing and branding, and—importantly—the creation
of databases and other digital systems as part of an economy’s crea-
tion of capital shows that digitalization does not happen on its own. As
indicated above, traditionally, the expenses on such intangibles have
not been capitalized in the national accounts (nor on company balance
sheets, for that matter), but important conceptual and empirical work
has transformed our view of how investment impacts productivity.10
This work divides intangibles into three broad categories: computerized
information (software and databases), innovative property (scientific
R&D, design and financial innovations) and economic competencies
(workforce training, improvements in organizational structures and
marketing and branding).
It turns out that Europe (here the EU-15 aggregate) has a much lower
investment intensity in intangibles than the United States (see table 3).
The share of all measured intangible investment in value added for the
Chart 3. Number of workers in manufacturing and non-manufacturing contributing to global pro-

duction of manufacturing products (1000s)
162
market sector in the EU-15 has increased by 1 percentage point, from

9.5 percent of market sector value added in the 1995 to 2002 period to
10.5 percent from 2008 to 2010, by which time it was about two-thirds of
the US intangibles share in market GDP, which was 15.3 percent.11 While
Europe’s intangibles intensity was below that of the US in all categories,
it was particularly weak in R&D and other innovative property and in
market research and advertising. Weaker R&D is, in part, related to
the less intensive, high-tech nature of Europe’s manufacturing sector
compared to the United States, whereas lower market research and
advertising intensity is due to a smaller share of distributional and
personal services in the European economies relative to the United
States. Within the EU-15, the Scandinavian countries, France and the
UK have the highest intangibles intensity, but even here, the gap with
the US remains significant. Many other EU-15 economies, include Italy,
Greece and Portugal, currently invest less than half in intangibles as a
percentage of GDP compared to the US.
The EU showed weaker growth than the US over the entire peri-
od in all three asset types and also saw lower increases especially in
computerized information and economic competencies (especially or-
ganizational capital) during the late 1990s. The intensity of intangibles
is, in part, related to the structure of the economy, which explains the
relatively high intangible shares for the United Kingdom and the United
States, which both have large shares of GDP in service sectors. These
economies have relatively large shares of their intangibles concentrated
in economic competencies, notably organizational investments, and in
ICT. In Germany, which has a share of GDP in manufacturing, the role
of innovative property, including R&D, is relatively more important.
ICT and intangible assets are connected in many ways. Some ICT
assets, such as software and databases, are themselves classified as
an intangible asset. ICT can also facilitate the deployment of other
intangible assets and enable innovations across the economy, such as
10 S ee, for example, C. Corrado, C. Hulten, and D. Sichel, D., “Measuring Capital and
Technology: An Expanded Framework,” in C. Corrado, J. Haltiwanger and D. Sichel,
eds, Measuring Capital in the New Economy, University of Chicago Press, pp. 11–46; C.
Corrado, J. Haskel, C. Jona-Lasinio and M. Iommi (2013), “Innovation and Intangible
Investment in Europe, Japan, and the United States,” Oxford Review of Economic
Policy 29 (2), 261–286.
11 The estimates refer to the ‘‘market’’ economy, excluding education, health and public
administration.
163
the re-organisation of production. It can also involve the streamlining

of existing business processes, for example, order tracking, inventory
control, accounting services and the tracking of product delivery. At
the same time, capital deepening in intangible assets also provides the
foundation for ICT to impact productivity. For example, the internal or-
ganisation of a firm plays a role in its ability to use ICT more efficiently,
in particular through managerial and other organisational changes.12
Going beyond complementarities between ICT and intangibles, there
is also increasing evidence of a strong relationship between intangible
capital deepening and total factor productivity growth. While consist-
ent with the existing evidence on spillover effects from R&D, the exten-
sion to other assets suggests that many intangible capital assets have
such public-good characteristics.13 Clearly, one also requires caution
by not overstating the realization of the spillover potential from intan-
gibles. For example, spillovers might not occur if intangible capital is
protected by intellectual property rules (copyright, trademarks, etc.)
or tacit knowledge (internal knowledge of supply chain management,
for example).
Towards closing Europe’s growth gap
While Europe’s economic policy agenda in the past six years has been
dominated by urgent pressures to stabilize financial markets, improve
macroeconomic conditions and lower unemployment rates, there is
also a need to focus on closing Europe’s growth gap relative to its own
pre-recession performance and US performance. Policy attention needs
to shift to a more medium-term focus on reigniting growth.
Despite huge political challenges, there is no shortage of possible poli-
cy solutions to accelerate Europe’s growth trend. The implementation of
structural policy measures, ranging from more investment in hard and
soft infrastructure to smarter regulation, more innovation and greater
room for entrepreneurship, will hugely matter to improve structural
12 I . Bertschek and U. Kaiser (2004), “Productivity effects of organisational change: Mi-

croeconometric evidence”, Management Science, 50(3): pp 394-404. T.F. Bresnahan,
E.Brynjolfsson, L.M. Hitt (2002), “Information Technology, Workplace Organization,
and the Demand for Skilled Labor: Firm-Level Evidence,” Quarterly Journal of Eco-
nomics, 117 (1): pp 339 – 376.
13 More extensive regression analysis in Corrado et al. (2013) suggests this to be the case.
164
conditions. The five headline targets set out in the Europe 2020 Agen-
da—create more jobs, accelerate innovation, improve energy efficiency,
strengthen education and reduce poverty exclusion—are fundamental
components of any successful strategy to deliver positive social change
and accelerate growth.
At face value, it makes much sense to direct our attention to invest-
ment as a key policy tool to revive growth, as is currently intended
under the European Commission’s Investment Plan. However, most of
Table 3. Investment intensity of intangible assets in the market sector as a percentage of

market sector GDP for EU-15 economies, 1995-2010
165
Europe’s investment gap is related to private sector investment, re-

quiring structural reforms that make markets function better across
Europe.14 In this contribution, we have put greater emphasis on the need
to strengthen investment in the area of intangible assets to drive inno-
vation and organizational change. Such investments can create positive
externalities to productivity. However, the productivity of investment
and the way it translates into total factor productivity growth depends
strongly on the ability to strengthen static effects (focused primarily on
cost reductions and allocative efficiency) and dynamic effects (related
to competition in product, labour and capital markets and innovation)
from a large single market in the European Union. Recent analysis
shows that the creation of Single Digital Market and a single market
for services across the European Union could contribute significantly
to unleash the productivity gains from larger market size.15
The sluggish recovery in productivity suggests that medium-term fac-
tors are still predominant in explaining the productivity slowdown. The
persistent shortfall in demand and an erosion of supply side factors, as
established by the long-term slowdown of potential output, can be an im-
portant explanation for Europe’s growth gap. However, it is also possible
that there is a lull in the emergence of productive technology applications
or that the negative productivity impact of the regulatory environment
is playing a larger role than before the crisis. These factors significantly
impact the timing and speed of the productivity recovery in Europe.
RELATED ARTICLES:
European Employment and Labour Market Policy
Transversality and Territory: On the Future

Dynamics of Regional Knowledge, Innovation & Growth
14 D IW, Economic Impulses in Europe, DIW Economic Bulletin, No. 7, Berlin, 2014
15 B. van Ark, Productivity and Digitalisation in Europe: Paving the Road to Faster Growth,
The Lisbon Council and The Conference Board, Brussels/New York, 2014; M. Mariniello,
A. Sapir, A. Terzi, “The long road towards the European Single Market,” Bruegel work-
ing paper 2015/01.
166
PHILIP COOKE is professor This paper reviews some key conceptual and
at the Center of Innovation
practical barriers that have hampered territori-
in Bergen University College,
Norway. Between 1991-2014 he al economic development prospects. Concep-
was university research profes- tual and comparative empirical studies show
sor of Regional Development,
director of the Centre for Ad- that regional knowledge and innovation flows
vanced Studies at University were no longer vertical, linear and cumulative
of Wales and professor of the
Oxford Institute for Sustaina- but horizontal, variegated and combinative.
ble Development. Formerly, he This evolutionary economic geography dis-
was an adjunct professor of the
School of Development Studies covery will be supported with insights from
in Aalborg University, Den- resilience and complexity theory and demon-
mark, and of LEREPS (Studies
and Research laboratory in strated by reference to three exemplars of
Economics, Policies and social transversality, which is the name for innovation
systems) at the University of
Toulouse, and editor of Europe- and knowledge flows policy that overcomes
an Planning Studies. the cognitive and policy lock-ins.
168
TRANSVERSALITY AND
TERRITORY: ON THE FUTURE DYNA-
MICS OF REGIONAL KNOWLEDGE,
INNOVATION & GROWTH
“By its nature, the metropolis provides

what otherwise could be given only
by travelling; namely, the strange”
(Jane Jacobs, 1961, 238)
Introduction
This paper plants the idea that territorial knowledge flows, whether
at urban, regional, national or international scale, have been changed by
knowledge economies. It examines questions such as: Does knowledge
still flow sectorally in specific industries? Do multinationals still dictate
knowledge flows within supply chains? Is policy-makers’ attachment
to the specialisation of economic development in vertical “knowledge
silos” appropriate? Surprisingly, perhaps, the answers to these and
related questions, after five years of recent research into Regional In-
novation Systems (RIS), were largely negative. However, as innovation
SYSTEMIC INNOVATION HAS CAUSED KNOWLEDGE

DYNAMICS TO BECOME LESS VERTICAL, CUMULATIVE
AND PATH DEPENDENT AND MORE TRANSVERSAL,
COMBINATIVE AND PATH CREATING.
theory shows, every paradigm shift meets initial resistance from the
ancien regime. Systemic innovation has caused knowledge dynamics to
become less vertical, cumulative and path dependent and more trans-
versal, combinative and path creating. This type of innovation is linked
by networks of buyers and suppliers of knowledge, goods and services.
This gives an answer to the question, sometimes asked: What, exactly,
is innovation for? The purpose of innovation is growth, measured in
terms of productivity, efficiency and effectiveness. It seems that capi-
talism, which from a Schumpeterian perspective is fueled by innovation,
169
must grow in order to survive. Growth is implicit in markets, whose

inefficiencies stimulate innovative efforts to create profits by seeking
better alignments between value and price1, whether of commodities,
companies or currencies. Desiring that more citizens have access to
the quality of life of the typical middle-class household in an advanced
economy is not a morally indefensible position, especially given the
massive inequalities that arise from the neoliberal dogma settled in
many of these countries—not to mention the inequalities between them
and the developing world.
THE HIGHER THE AVERAGE LEVEL

OF HUMAN CAPITAL, THE MORE RAPID THE DIFFUSION
OF KNOWLEDGE, THEREFORE THE HIGHER THE LEVEL
OF REGIONAL PRODUCTIVITY
Growth is increasingly sought and found by firms and relevant support

organisations which explore “relatedness” within and beyond regional
boundaries. Relatedness describes firms that understand each other’s
business models, skillsets and technologies, even though they belong to
different industries. These firms, although hidden in different sectors,
may nevertheless offer innovative learning opportunities if they can be
identified. This perspective is supported by at least three new territorial
models. The first is New Economic Geography (NEG), which encourages
systemic regional innovation in terms of labour pooling behaviour. Firms
and workers seek out regional markets and financial spillover effects,
co-locating or agglomerating when they find a region where industry has
a lead due to innovation (Felsenstein 2011; Krugman 1991). Some model-
ling deficiencies persist in this perspective since it continues to produce
misleadingly over-specialised and over-concentrated spatial results2.
1 A
n anonymous referee queries this distinction. It is hoped that the following illustration
is helpful. The price for a plumber to fix a burst pipe at a customer's home may be €5
for travel, €2.50 for materials and €10 for an hour’s labour. However, the value of the
service to the customer, who may have water leaking all over his house, is far greater
than that, so the plumber typically estimates the price the customer will pay at €100.
Investment bankers arbitrage such value to price differences for profit in the financial
services industry.
2 K rugman (1991) displays the centrality of innovation in his theory of city agglomeration
while admitting it is simplistic: “There are assumed to be two technologies for produc-
ing manufactured goods: a ‘traditional’ technique that produces goods under constant
returns at a unit cost c1, and a ‘modern’ technique with a marginal cost lower than c1,
170
An alternative that does not fall into the trap of over-emphasising a

single type of knowledge determinant of regional growth is New Growth
Theory (NGT), which offers better insights into endogenous (i.e., local or
regional) technological growth. Here, by analysing regional knowledge
externalities and spillovers, the approach estimates the way in which
human and physical capital, labour mobility and innovation impact re-
gional productivity and growth (Martin and Sunley 2006). According
to the NEG model, the increasing returns theory also supports the
deduction that the higher the average level of human capital, the more
rapid the diffusion of knowledge and, therefore, the higher the level
of regional productivity, including earnings (Felsenstein 2011). Thus,
NGT incorporates different kinds of regional knowledge and innovation
into the innovation-productivity analysis. However, while human and
physical capital combine positively to affect regional productivity, the
model’s results are weakened by a regional innovation effect.
A third approach, Evolutionary Economic Geography (EEG), receives
some degree of support from this inconsistency. This perspective con-
siders institutions, organisations and cultural practices as critical to the
creation of regional growth. Cultural and institutional proximity are as
important as spatial proximity, and the region represents an active in-
novation agent. This phenomenon has recently been termed Territorial
Embeddedness Innovation (TEI), to be distinguished from Scientific
and Technological Innovation (STI), and Doing, Using and Interacting
(DUI) innovation (Nunes and Lopes 2015; Jensen et al. 2007).
Accordingly, this contribution summarises new arguments and find-
ings concerning territorial knowledge dynamics, which pose problems
for the prevailing understanding of innovation and knowledge theory.
This paper is constructed around answers to four such problems raised
by the testing of an EEG-informed theory and supported by wide-rang-
ing and structured evidence. Our approach is marked by two sub-sec-
tions: one theoretical and the other empirical.
The first of the theoretical questions is: Does the interactive model
of innovation that replaced the prevailing linear model now require
but that involves a fixed cost F per production site[…] If manufacturing is dispersed, an
optimally located modern plant will be a distance of 1/4 from its average consumer, and
will thus incur transport costs tx/4. On the other hand, if all manufacturing were con-
centrated at z=O.5, an urban plant located at the same point could serve a fraction π of
consumers at zero transport cost, and incur transport costs of only (l—π) tx/4[…] This
story bears an obvious resemblance to the Big Push story of Rosenstein-Rodan (1943).”
171
re-engineering? The linear model that proposed innovation followed a

path from research and development (R&D) to prototyping and testing
and then to commercial innovation on the market. This interactive
model provided feedback among suppliers in value chains.
The second theoretical question, deriving from the Schumpeterian her-
itage, is: What counts as radical innovation? Does it only occur once every
sixty years? Or does the process occur more frequently? Long wave theory
proposes that the mechanisation of railways during the nineteenth centu-
ry was radically overhauled by electrification and automatisation in motor
vehicles in the 1900s and informatisation in computers in the late twenti-
eth and early twenty-first centuries. Additionally, does the associated reg-
ulatory regime resistance, which is sometimes a stimulus for innovation,
last for lifetimes? Does this mean there needs to be swifter paradigm and
regime change, through economic drivers and government regulation, in
the industries or industry platforms that display relatedness?
The next, more practical, question is: Are innovators also entrepre-
neurs? Or do the complexities of distributed knowledge dynamics mean
there is a diversity of global actors helping to translate knowledge into
commercial products and services? Does new knowledge dynamics
thinking make path dependence—historical industrial development tra-
jectories—redundant? Or, is that knowledge used for “branching” and
new path creation when transversal, or crossover, knowledge dynamics
are exploited? These issues will be addressed, and their resolutions
illuminated by reference to EEG research findings (Frenken 2006).3
Evolutionary Economic Geography Theory
This section will say little about NEG or NGT but much more about
EEG (Boschma and Martin 2010). Evolutionary Economic Geography
3 A
n anonymous reviewer holds that EEG after the Dutch approach should be cautioned
against because it suffers from ergodicity, in which all future states of the model must
be in the model at the beginning. A priori, this seems unlikely for any kind of economic
geographer given that, in Boltzman’s initial formulation, the term refers to a “…dynam-
ical system which, broadly speaking, has the same behaviour averaged over time as
averaged over space.” Moreover, EEG research shows that relatedness, which equates
very much to eurodite thinking on territorial knowledge dynamics (TKDs), includes
revealed related variety as well as unpredictable ex ante but rather only understand-
able ex post.
172
theory exemplifies the evolutionary biological concept of exaptation

(Vrba and Gould 1982). The late evolutionary biologist Stephen Jay
Gould held that a new word was needed to account for the biological
process whereby an obsolescent organ evolves a new use over time and
possibly even in a different species. Examples include human inner ear
bones, which were once the jawbone joints of an extinct fish species,
and fish with buoyancy bladders, which have exapted the lung func-
tions of earlier amphibious species, so the word proved useful. Evo-
THE CO-EVOLUTION OF INSTITUTIONAL REGIMES

AND RELATED PARADIGMS IS AN EXTREMELY FRUITFUL
WAY TO CONCEIVE OF REGIONALLY ADAPTIVE
SYSTEMS OF INNOVATION
lutionary economic geography is a new discipline which has exapted

concepts as old as nineteenth century classical economics, the forebear
of the neoclassical perspective. “Cumulative change” Veblen”s (1898)
precursor of Myrdal”s (1957) “circular cumulative causation” (CCC)
was an early species of “increasing returns” (Krugman, 1995). New
neoclassicals created NEG by relaxing neoclassical assumptions in-
cluding “constant returns”, “perfect information” and “equilibrium
outcomes”. Evolutionists are as interested in increasing returns, ap-
propriated by “new neoclassicals” like Krugman, for understanding
basic spatial growth processes as neoclassicals are. But that interest
is far less mechanistic and reductionist, emphasising much more the
institutional, co-evolutionary and path dependent (historical) aspects
of change (Martin & Sunley, 2010). EEG also favours disequilibrium
rather than equilibrium or even partial-equilibrium explanations for
the crisis-ridden “progress” of capitalism. It does not assume economic
balance and stability are normal but rather the reverse, namely that
they are unusual and economic crisis conditions reflect such general
conditions of instability.
The co-evolution of regional institutional regimes and related regional
paradigms, including economic mixes of industries, is an extremely
fruitful way to conceive regionally adaptive, or changeable, systems of
innovation. To explain innovation and growth, it is as equally inadequate
to privilege external shocks as it is to privilege endogeneity—that is,
internally-generated growth impulses. If we think of regional regimes
as varying combinations of organisational or governance structures
173
that interface with institutional conventions, we immediately have a

conceptual grasp of regional variety.
This combination of formal governance, or regulatory rules, and in-
formal practices, of business associations, for example, indicates an
important source of regionally distinctive outcomes. We can think of
these in terms of hierarchical, adaptive system interactions. Thus, econ-
omy, politics and culture are different everywhere because regions and
nations vary within systems with multi-level governance, as for example,
the system involving the EU, its member-states and regions.
THE NOVELTY OF INNOVATION LIES IN ITS

RECOMBINATIONS RATHER THAN ITS INGREDIENTS, WHICH
WERE ALWAYS THERE AWAITING DISCOVERY
If, furthermore, we add the notion of regional paradigms as related

varieties of path dependent, socio-technical systems—that is, indus-
try mixes that comprise a regional or national economy—(Geels 2007),
the interaction of these knowledge flows produces innovation. Arthur
(2009) calls this combinative, or combinatorial, evolution in his book on
the nature of technology and innovation. For Martin (2010), this con-
stitutes path interdependence, a far more dynamic concept than path
dependence because it is in recombinant knowledge collisions that all
innovation lies (Schumpeter 1934). So, we move from a vertical, linear
and sectoral view of knowledge flows to one that recognises horizontal,
interactive and inter-sectoral knowledge flows for innovation.
These are bold claims that require further elaboration. Put simply,
Arthur’s most recent statement about the ubiquity of bricolage, or re-
combination, as the midwife of all innovation may, from some perspec-
tives, underestimate the role of truly novel knowledge. However, for en-
gineering, which was Arthur’s first calling and from which he gets much
exemplification, including the complex path dependence of jet engine
technology, it is probably a more reasonable assertion than for, say, bio-
technology, which he also declaims. Even some keystone biotechnology
knowledge, like DNA, nevertheless betrays a “ghost in the machine”4—a
4 The expression “ghost in the machine” is an allusion to the critique made by philosopher
Gilbert Ryle, in 1949, about Descartes’ dualism, according to which both mind and soul
are heterogeneous substances. In this context, the expression could point to the occa-
sion when concepts from certain disciplines are used in a different science.
174
metaphor exapted from elsewhere—, like the physicist Schrödinger’s

idea that DNA might resemble a non-repeating crystal.
So what constitutes truly novel knowledge? Briefly, two examples
must suffice. The first was the 2000 Nobel Prize-winning research by
Heeger, MacDiarmid and Shirakawa (1978), which revealed that the
prevailing scientific consensus that polymers could only insulate elec-
tricity, not conduct it, was wrong. That research is now the basis for
Samsung’s Active Matrix Organic Light Emitting Diode (AMOLED)
technology, which replaced liquid crystal in the screens of its Android
4G LTE smartphones.
The other example is the nanotechnology research of Maria Strømme
and her team at Uppsala University (Nystrom et al. 2009) on the fil-
tering properties of special paper. When their filter paper was tested
in a lake suffering eutrophication (algal blooms and de-oxygenation),
it produced electrolytic effects from its interaction with specific algae.
A method of utilising algae to store electricity in a battery was thus
discovered from a completely unknown source. The battery can be
recharged much faster than a lithium battery.
The cellulose that Strømme and her colleagues used comes from a
polluting type of algae whose cell walls contain cellulose with a distinc-
tive nanostructure, giving it 100 times the normal surface area. The
researchers coat paper made from this cellulose with a conducting
polymer and then sandwich a filter paper soaked in a salt solution be-
tween the paper electrodes. It charges in a few seconds, and it is flexible,
sustainable and non-toxic. Hence, though the battery application utilis-
es the conducting polymer, the discovery represents novel knowledge
about the electrical storage capabilities of algae, and possibly presents
a solution to the age-old problem of storing electricity at scale and over
long periods of time.
So, we conclude this “nothing new under the sun” debate by asserting
that the novelty of innovation lies in its recombinations rather than its
ingredients, which were always there in atomic, molecular or memetic
forms, awaiting discovery. For example, it should be noted that algae
contain many previously undiscovered yet potential commercial oppor-
tunities, including the synthesis of Omega-3 nutrients from rapeseed oil.
In complexity theory, these knowledge and innovation processes
would be referred to as exploration of the adjacent possible, in the first
case, and preadaptation, rather than the more biological exaptation,
in the second. The adjacent possible is a search process that seeks
175
novel solutions, many of which are incremental innovations that begin

relatively close to the existing problem. Such novelty becomes radical
innovation when the knowledge recombination search swiftly reveals
numerous related innovation possibilities and potentials. In the case of
paper batteries, the adjacent possible was the application of old knowl-
edge (conductive polymers) to new knowledge (electrolytic algae) to
create an eco-innovation.
Preadaptation, which is a more common innovation process, starts
with already existing innovation, which is then preadapted to a new
setting, either by some kind of cognitive reversal or by adaptively trans-
ferring it from one industry to a wholly different one (Kauffman 2008).
Kauffman’s exemplar of cognitive reversal preadaptation concerns the
invention of the modern tractor, specifically the early massive engines
that continually broke the chassis when mounted. An engineer, noting
the scale and rigidity of the engine block, suggested it could form the
chassis. The historical innovation was Henry Ford’s Fordson Model F,
which was completed in 1916 and was the first lightweight, mass pro-
duced tractor in the world. Ford engineer Eugene Farkas successfully
designed the engine block, transmission and axle housings, which bolt-
ed together to form the basic structure of the tractor. By eliminating
the need for a heavy, separate chassis, costs were reduced and manu-
facturing was simplified.
We could also point to the Wright brothers’ innovation of the aero-
plane, which combined bicycle, boat, kite and automotive technologies
in the form of wheels, chains, propellers and motors from different
industries to fulfil the purpose of creating a flying machine.
Today, preadaptation is consciously practised by the regional
cross-cluster and sectoral knowledge transfer agency Bayern Innova-
tiv for its industry members. This process involves large numbers of
variably-sized and themed meetings of industry innovators evaluating
the preadaptation (or knowledge and innovation transfer) potential of
innovations already implemented in other industries, as described by
Cooke et al. (2010).
One interesting example of preadaptation, given by Cooke et al. (2010)
occurred when BMW exhibited the nanotechnology-refined textile that
kept the seats of its new model free from dirt. Nano-filters had been
embedded in the seat fabric to produce this effect. Sitting in the audi-
ence were representatives of hospitals and medical clinics. They im-
mediately thought that such an innovation could be used to reduce the
176
amount of bacteria and dirt that stick to medical uniforms if a suitable

textile could be produced with the same filtering properties. Over time,
that innovation-transfer was achieved, and the new product is now on
the market.
So much innovation, in the form of commercialised recombinations,
has occurred historically that transversality will typify innovation op-
portunities in the future. Currently, transfer occurs face-to-face and by
word-of-mouth, but it is easy to see how a firm or agency could make
such knowledge available as a market offer.
Territorial Knowledge Flows and Innovation Issues
Does the interactive model of innovation that replaced

the prevailing linear model now require re-engineering?
The conventional wisdom about innovation is in need of an overhaul. It

was noted at the outset of this contribution that transversal knowledge
flows not only pose problems for the cumulative model of innovation,
but also for the linear (STI) and interactive (DUI) versions of this model,
which have dominated the understanding of innovation for decades
(Balconi et al 2010; Kline and Rosenberg 1986). Both share verticality:
STI from its emphasis on intra-corporate knowledge flows, from R&D
laboratories to marketing and sales departments, and DUI from the
recognition that supply chains became more clearly emergent with the
onset of Japanese modes of lean production.
The older theories focused on innovation without much thought to
what it was for or how knowledge acquisition to achieve innovation was
related to it. This could mean one of two things. First, it could be that
innovation was once linear, cumulative and closed, but that is no longer
the case. This seems unlikely from a complexity perspective because
Kauffman (2008) stresses that the key feature of complex adaptive so-
cio-economic systems is that:
The more diverse the economic web, the easier is the creation of still fur-
ther novelty […leading to…] a positive correlation between economic di-
versity and growth (Kauffman 2008, 151-160).
177
Similarly, as Arthur (2009) sees it:
When a network consists of thousands of separate interacting parts and

the environment changes rapidly, it becomes almost impossible to design
top-down in any reliable way. Therefore, increasingly, networks are being
designed to “learn” from experience which simple rules of configuration
operate best within different environments (Arthur, 2009, 207).
What is more likely is that the framing of these innovation models was
wrong. This means that observers misunderstood and over-simplified
what they thought they had seen, or perhaps had not seen because
most innovation occurs in confidential situations. Contrariwise, what
was always present even in portrayals of intra-corporate or intra-sup-
ply chain innovation orderliness was a great mixture of purchasing or
borrowing of adjacent extramural ideas, possibilities and solutions from
related and even unrelated industries. Individual scientists, knowledge
entrepreneurs and consultant experts come to mind as innovation con-
tributors in this case. Even Alexander Fleming, who innovated antibiot-
ics, was helped by his housekeeper to notice his discovery of penicillin,
which she thought was cheese.
TIME AND VARIETY DISTINGUISH

SYSTEMIC FROM ROUTINE INNOVATION,
RENDERING THE FIRST EPOCHAL BY USHERING
IN A LONG-WAVE TECHNOLOGICAL REGIME
Accordingly, other than describing such bricolage, theorists at the

time lacked an interest, or a theoretical discourse, in which to position
such messy processes. So, the evolution of knowledge flows around
platforms of innovation, integrated by digitisation as facilitators of eco-
nomic growth, has both shattered the hitherto prevailing narrative of
cumulative orderliness and introduced “an image of wholeness, and
within that wholeness a ‘messy vitality’” (Arthur 2009, 213).
What counts as radical innovation?
If all innovation is bricolage, where one innovation builds on a preceding

one, or more, to fill a niche formed by an opportunity created from what
has gone before, it seems difficult to find a place for anything other than
incremental innovations that explore possibilities of preadaptation or
178
the adjacent possible. Kauffman (2008) frequently uses the tractor met-
aphor to marvel at the ingenuity of mankind, but he also notes how, for
example, the innovation of the remote TV channel control could simply
not have been envisaged in a society without TV, or more particularly,
multi-channel TV.
This gives a clue to the reasons why it is important to differentiate
between innovation in general, which uses preadaptation and adja-
cency and is therefore incremental, and radical innovation. Wheth-
er that means most innovation occurs in geographic proximity is an
open question to which we will return. But, for the moment, research
on the history of innovations (e.g., Johnson 2010) suggests most are
produced in geographic proximity to where adjacent possible opportu-
nities arise, and most contain unexpected elements, for example, the
aforementioned paper research that found electrolytic algae). Even if
knowledge flow interactions are inter-continentally relational, inno-
vation is recombined at the spatial point of the innovator, or the team.
Johnson (2010) allows only one exception to this rule: the “multiple”,
when an innovation (e.g., the incandescent light bulb) occurs simulta-
neously and independently in different regions. Hughes (1983) argues
that Edison gained priority for the light bulb because he also innovated
a co-evolving electricity generating and lighting system. This is a clue
to the difference between long-term radical innovation and short-term
incremental innovation: the former swiftly stimulates a variety of re-
lated innovations.
Time and variety distinguish systemic from routine innovation, ren-
dering the first epochal by ushering in a long-wave technological re-
gime that envelops, protects and facilitates the exploitation of the new
growth-inducing technological paradigm, both classically as well as in
our contemporary informational economy. But, within that technologi-
cal paradigm, many shorter-term, but still radical, innovation episodes
occur today, affecting retail, newsprint, recorded music and even taxi
transportation firms.
Time is also an important factor in the creation of episodic radical
innovation. Change occurs more swiftly in creative design and “cogni-
tive-culturally” inspired industries, like smartphones, than in light bulbs.
Here, instant shifts in socio-cultural meaning can be captured through
the phenomenon of “circles” in design driven industries, or crowdsourc-
ing and crowdfunding as practised by apps firms in the smartphone
industry (Scott 2008; Pisano and Verganti 2008; Page 2007).
179
So, we conclude that the original idea of radical innovation survives

but needs variegation conditional to different temporal innovation
frames, whose knowledge turnaround speeds are conditional to their
conscious exploitation of the crossover of knowledge or actual inno-
vations among firms or industries—transversality (Cooke 2013). Illus-
trative material on this phenomenon for the Swedish regions of Skåne
and Västra Götaland and the French Midi-Pyrénées is presented below.
Are innovators also entrepreneurs?
This question addresses the complexities of distributed knowledge

dynamics, asking if there is a diversity of global actors assisting the
translation of knowledge into commercial products and services. This
is not the old individualist question about believing innovation to be
the product of genius. It is far more important than that and relates
to a common misconception that entrepreneurship and innovation are
different sides of the same coin, or worse, that they are the same thing.
If that was ever true, it seems decreasingly so nowadays. Even Schum-
peter (1934) is clear that the key skills were very different: the innovator
recombined knowledge while the entrepreneur assembled the financial,
legal and human resources to commercialise it.
EEG research has registered the rise of complexity in the intermedi-
ation of innovation processes by practitioners of knowledge-intensive
business services (KIBS), who are found performing crucial coordi-
nating, advisory and consulting roles in most industries (Strambach
2010). These include management accountants, venture capitalists,
patent lawyers and so on. Even knowledge-intensive business services
for farming are located in cities where insurance, credit and technical
talent is found, rather than in the rural markets for such services. But
KIBS are a very large platform of differentiated knowledge, which re-
turns us, momentarily, to the question of geographic proximity.
Clearly, the phenomenon of rural services being supplied from met-
ropolitan locations reveals how the presence of global talent pools,
their knowledge spillovers, and relatedness across industry bound-
aries allows for fluid entrepreneurial activity to be conducted in an
urban ecosystem by KIBS of many sizes. Ironically, indicators of such
knowledge-intensive entrepreneurial concentrations place cities like
Stockholm and London at the peak of the European hierarchy for their
disproportionate shares of employment in KIBS and the lesser category
180
of high-tech manufacturing (Cooke and Schwartz 2008), but they also

show London, at least, to underperform UK regions on innovation per
capita (Chapain et al. 2010). So, it seems likely that knowledge-intensive
entrepreneurs are located in different places than innovators.
THE INNOVATOR RECOMBINES

KNOWLEDGE WHILE THE ENTREPRENEUR
ASSEMBLES THE FINANCIAL, LEGAL AND HUMAN
RESOURCES TO COMMERCIALISE IT
More precisely, most KIBS and high-tech manufacturing workers in

cities are clearly neither entrepreneurs nor innovators. Rather, they are
clerical, secretarial, retail and administrative workers, which corrects
the discourse that emphasises the creativity of large cities, at least
regarding the composition of their labour markets. From this research
on cities, we conclude that entrepreneurs are increasingly divorced as
actors and in geographical terms. This is a source of the difficulty inno-
vators have in launching new start-up businesses, especially in Europe.
Does the new knowledge dynamics paradigm

make path dependence redundant?
This is possibly the most interesting question posed by the EEG re-
search. Traditionally, path dependence has been associated with
somewhat negative outcomes, like the “lock-in” of older industrial re-
gions to outdated industry and management practices (Grabher 1993).
David’s (1985) equilibrium perspective over-emphasised such issues.
Nowadays, that research is criticised in favour of a more open and in-
novation-friendly perspective (Martin 2010). A second weakness was
Arthur’s (1994) reliance on chance or accidental explanations for in-
novative events that shift path dependence (Martin and Sunley 2010).
Building on a more socially constructive conception of path dependence,
reflective of Garud and Karnøe’s (2001) notion of innovation, which
also involved mindful deviation by social agency to affect change, EEG
has introduced the notion of path interdependence. Martin and Sun-
ley (2010) thus align this adjusted perspective on path dependence
to another key EEG concept, namely proximity. This shift towards a
mobilisation explanation for innovation, when linked to the multi-level
perspective idea of co-evolving socio-technical systems, allows us to
181
incorporate the key complexity theory concepts of preadaptation and

the adjacent possible in a rather satisfactory explanation of emergent
regional knowledge flows and innovation. Allowing for the likelihood
of market failure by firms which do not explore regional paradigm re-
latedness sufficiently, thereby delaying the onset of new path creation,
opens up regional regime opportunities for government or governance
organisations to introduce firms to both regional and non-regional in-
novation as a preadaptive form of transversality and to encourage ex-
ploration of structural holes or white spaces among regional paradigm
elements (Burt 1992; Johnson 2010). Thus, we begin to see more clearly
the element of path interdependence that defines key spatial forces
underlying and influencing inter-organisational relations.
POLICY MAY BE ACTIVE WHEN MARKET FAILURE

MEANS THAT POTENTIALLY COMPLEMENTARY FIRMS
OR INDUSTRIES IN GEOGRAPHICAL PROXIMITY NEVER
MEET TO DISCUSS POSSIBLE INNOVATIONS
Martin and Sunley (2010) refer largely to the economic geography di-
mension, including interdependent technological paradigm interaction,
which will be explored in more detail under the rubric of relatedness
conjoined to transversality. This moves the discourse closer to that of
regional regime and paradigm interaction because transversality is the
policy correlate of relatedness among industries or firms. Policy—wheth-
er created by government, public-private governance, or private govern-
ance through intermediary or lead-firm initiative—may be active when
market failure means that potentially complementary firms or industries
in geographical proximity never meet to discuss possible innovations.
If policy is not active, then innovative structural holes (Burt 1992) will
remain unidentified, unless and until a firm’s search of the selection envi-
ronment eventuates, possibly due to the rise or entry of new incumbents
(see below). High market uncertainty in a context that values innovation
as the highest virtue of the accomplished firm and region, owing to its
overwhelming contribution to productivity and growth, means regional
regimes or governance systems increasingly assist such searches for
structural holes by inducing speed-up in the process.
182
Empirical Tests of the Foregoing: Brief Comparative Case Analysis
The Skåne Region
EEG and other research shows the strength of this region in Sweden to
be clustered in agro-food production and services, including functional
food based on biotechnology applications, like health drinks, and or-
ganic food offered in farms, public canteens and restaurants, as well as
conventional mass production using industrialised productivist chem-
icals, pesticides, fungicides, herbicides and other conventional control
technologies. A once strong but now fading path dependence was seen
in the region’s historical industry trajectory of shipbuilding in Malmö,
but the closure of the Kockums yard in the 1980s led to redundancy and
migration of shipyard workers—some to wind-turbine engineering in
Jutland, Denmark.
By early 2010, the western harbour area had been reinvented as a
centre of cognitive-cultural activity by the media. Activity promoted by
the regional development agency also included mobile telephone com-
panies (Mobile Heights), new media (Media Evolution), and the Skåne
film industry, which included computer gaming. An emergent clean-tech
industry and a systems resilience initiative were also beginning to be
visible. This area prioritised regional paradigm resilience while the next
regional account, also from Sweden, emphasised regional regime resil-
ience aspects.
Mobile Heights5
During the 2000s, Mobile Heights’ territory was invaded by rapidly

expanding Asian producers, including Samsung from South Korea
and Huawei from China. This resilience shock (Gunderson and Holling
2002; Folke 2006) led Sony Ericsson to reduce shipments of hardware
and refocus on managing global services, such as selling network ser-
vices to mobile telephone suppliers, including Telenord and Telia. To
the latter, they also sold the extra service of managing the network,
leaving the client to simply manage billing and cash flow. Accordingly,
5 M
obile Heights is a non profit organization whose mission is strengthening the Scania
Region as a hotspot for mobile innovation. Members include companies, industries, as-
sociations, academic institutions and public organizations
183
Telia began cutting employment in the mid-2000s and has not filed
more patents. ST Ericsson, the telephony infrastructure arm of the
Ericsson Group, seemed unlikely to survive as a stand-alone company,
and Sony Ericsson, the Ericsson mobile telephone joint venture, was
dissolved. Nokia, Finland’s flagship with a telecoms presence, also no-
sedived at that time.
The main competition for key Mobile Heights’ member Sony Ericsson
was Huawei, which had an office in Lund, Mobile Heights’ home base, for
the development of basic components of mobile phones. This augment-
ed their offices at Kista Science Park in Stockholm, and Gothenburg, to
employ 250 engineers. Huawei took advantage of cutbacks by Ericsson
in Lund, which had made hundreds of qualified engineers available. The
range of Huawei manufactures increased from base stations to mobile
Internet modems and its own telephone handsets.
Resilience theory from EEG promises a response to resilience shock,
so what was the regional and firm response to these perturbations?
On the regional level, an emergent clean-tech industry (Sustainable
Hub) and a systems resilience initiative (Training Regions) began
to become visible around 2010. Both related to an EU Europe 2020
Grand Challenge shared with the Västra Götaland region to contrib-
ute Swedish expertise to the construction of sustainable cities (see
fig. 1 below). On the firm level, Sony Ericsson rather fruitlessly began
evolving “open innovation” relationships with innovative start-ups.
Even S.T. Ericsson, which was a classic “closed innovation” firm, be-
gan to buy from external suppliers while actively seeking to contract
or acquire them.
There were quality entrepreneurial firms in Skåne; for example, the
near bankrupt Canadian mobile telephony firm RIM, which produc-
es BlackBerry, acquired user-interface maker The Astonishing Tribe
(TAT) in 2010. Moreover, Polar Rose, a Malmö startup which built a fa-
cial recognition programme that linked to Facebook photos, was bought
by Apple for $29 million, also in late 2010. Other open innovation con-
nections involved Mobile Heights’ start-ups that joined AstraZeneca
in the Life Sciences platform for remote diagnostics telephones and
biosensors. Lateral linkages were also in position with the Media Evo-
lution (Nordic Game) cluster member.
184
Media Evolution
This Skåne regional cluster concentrated on convergent media, or new

media. It promoted the emergence and growth of start-ups in relevant
fields. Most such new firms had entrepreneurial leaders with at least
two to three years of experience in larger companies, while a minority
came from Lund or Malmö University. Polar Rose, for example, grew
out of computer vision research—the analysis of digital images and
AN EMERGENT CLEAN-TECH INDUSTRY

(‘SUSTAINABLE HUB’) AND A SYSTEMS RESILIENCE
INITIATIVE (‘TRAINING REGIONS’) WERE BEGINNING
TO BE VISIBLE AROUND 2010
video—at the Universities of Lund and Malmö. Polar Rose entered the
Teknopol Mobile Heights Business Centre in 2004. Teknopol was a tai-
lored business advice agency specialising in start-up activity for the
Mobile Heights Business Centre, Sustainable Hub and Life Sciences
Business Centre, each of which related to the Skåne region’s white spac-
es, or cluster-platform programmes. Polar Rose was given an initial
loan of €30,000, as a Sony Ericsson spin-out, to develop academically
originated face-recognition software.
TAT, purchased in 2010 by Research in Motion, was started in 2002.
TAT was to fit its user experience-user interface (UX-UI) applications
into BlackBerry’s PlayBook and smartphone platform. This was a pio-
neer user of novel social media forms like crowdsourcing (Shirky 2010)
and crowdfunding of anything from film projects to start-ups. According-
ly, crowdsourcing was another open innovation response to global, cor-
porate competitive forces impinging on large Swedish ICT incumbents.
Another cross-sector media-ICT innovation link included Qubulus, a
system platform for indoor positioning on which location based services
could be developed by Qubulus or by an application developer commu-
nity through a shared application programming interface. The platform
aggregates positioning input from proprietary web services and mobile
apps to hardware installations. By using the best technology to fit the
usage and purpose of the customer case, Qubulus can meet user demand
and solve the problem of indoor positioning. Crowdsourced positioning
activities are a focus in designing space syntax for people flows, shopper
movements in retail malls and product finder smartphone applications.
185
The Västra Götaland Region:

“Iconic Projects” Innovation Platform Management
Transversal policies were, at this time, also the characteristic ap-

proach taken in the Västra Götaland region, in Gothenburg. A strate-
gic decision was taken to concentrate initially on meeting the Europe
2020 Grand Challenges of Climate Change and Healthcare. In 2003,
the region had been one of the first in the world to publish a climate
change response strategy report, Gothenburg 2005, involving policies
for “smart energy”. This report then evolved into a strategic target for
the Västra Götaland region to be totally free of fossil fuels by 2030, in
what became known as the Gothenburg Model of the Lisbon Strategy.
However, working out the region’s position on that Grand Challenge in
advance gave scope for the new environmental strategy to be down-to-
earth and practical. This meant focusing on iconic projects committed
to innovation, learning and collaborative platform management labo-
ratories (see fig. 1).
Thus, the particularisation of the Climate Change Grand Challenge
involved translating it into a sustainable cities initiative triggered by
a large infrastructure commitment to a new tunnel, which brought to-
gether numerous regional clusters involved in renewable automotive
fuels, forest plastics, petroleum and health. At a more detailed level,
these assembled pilot projects mixed expertise in cluster firm logistics,
public transport, visioning (computer graphics and imaging) and green
accounting.
They also linked with Chalmers University and specialist firms like
Asta AB. A comparable iconic project approach was taken in healthcare,
and the project in question involved a new health complex centred on
a Medical Health Imaging Facility at the University Medical School.
This connected transversally to digital signals processing (data com-
pression) and medical diagnostics engineering expertise at Chalmers
University and one of its spinout firms, Medfield Diagnostics.
Midi-Pyrénées
The interest here is in an economically strong but over-specialised re-

gion that has a narrow path dependence paradigm composed of agro-
food, aerospace and healthcare with biotechnology inputs, but a strong
regional regime that emphasises transversality as a policy model. In
186
the French Pôles de Compétitivité contest, the region was successful

in accessing national cluster-building funding to complement abundant
regional and European resources. Remarkably, the regional govern-
ment practises a policy, which it calls transversalité, to populate its
narrow regional paradigm with greater path interdependence. Chart 2
represents a process diagram of the regime methodology for inducing
transversality from the regional paradigm in a strong way. The steps
involved in this process first prioritise the formation of a large, consoli-
dated pool of financial resources derived from the Midi-Pyrénées region,
the French government and the EU.
The next step was to build a methodology for determining how new
and greater innovation could be extracted from the region’s leading
industries by emphasising transversality among them. This led to two
parallel exercises. The first, CAVALA, was a statistical review of the
Chart 1. Västra Götaland’s Iconic Projects Cluster-Platform Approach.

Source: Center of Innovation, Bergen University College.
187
strengths and weaknesses of the main clusters and leading firms with
respect to innovation and innovation potential. This led to recognition
that, in effect, only two types of existing and established firms were like-
ly to be good innovation candidates: lead firms, like EADS and Thales in
aerospace, and hub firms or firmes pivots, which are important systems
integrators or aggregator firms in supply chains. To these were added
innovative spin-out or start-up businesses.
Leading candidates from agro-food, aerospace and bio-healthcare
were then put in a transversality group to consider methodologies, in-
centives and conventions by which they might proceed to talk across
sector and cluster boundaries, known to be an especially difficult task
where tacit knowledge is concerned (Janowicz-Panjaitan and Noorder-
haven 2009). In these group discussions, the key focus was on technol-
ogy, its known properties and cross-pollination potentialities, barriers
to innovation from cognitive research or resources and, as noted, meth-
odologies by which firms might find each other, despite their apparent
un-relatedness, in order to generate regional innovation through the
exploitation of relatedness. This is a new, French, top-down model that
Chart 2. Path Inter-dependences and Transversality
188
seeks to induce innovation by a formal imposition of the conventions of

transversality on regional firms.
Confusion and Contradiction in EU Innovation and Growth Policy
Between March 2013 and June 2015, we researched innovation in Portu-

gal at both national and regional levels (Algarve, Centro and Norte re-
gions). The aim of the research was to measure the distance between the
transversality theory of innovation outlined above and the new Regional
Innovation Strategies 3 (RIS3) methodology promoted by the European
Commission under the rubric of “smart specialisation.” Specialisation is
clearly the opposite of variety or diversification, so we were interested to
see how this contradiction worked in practice. Were regions sacrificing
valued industries to promote smart specialisation? Was the idea even
understood? And how, after the Commission was criticised for its linear,
sectoral and specialisationist approach so that it had to propose in foot-
notes that related variety and DUI-type innovation were also examples
of smart specialisation did its regional and national clients manage the
resulting confusion (Kroll 2015)?
This proved to be an interesting laboratory for observing multi-level
governance tensions, from regional to national to supranational levels
of interaction. The context is unique in that a slow-moving, cumber-
some and—as many see it—spatially myopic and conceptually chaotic
European Commission belatedly sought to induce a new, post-program
budget and linear regional economic development model to promote
growth while imposing major constraints in the form of austerity policy,
budget cuts and draconian debt repayment conditions. At its worst,
the austerity strategy has massively impoverished Eurozone member
Greece, and while Portugal emerged from the imposed fiscal straitjacket
without the same devastating results, the hallmarks of contradictory
thinking remain evident about how the EU believes it promotes growth
by imposing conditions that ensure the opposite.
In brief, the studied regions and even, to some extent, the state ig-
nored the precepts of specialisation and pursued the common-sense
potential of optimising their regional diversity to promote regional
innovation (Cooke 2015). This meant Algarve aimed to escape its nar-
row over-specialisation in “sun and beach” tourism by pushing for DUI
applications of renewable energy, marine biology, ICT and creative
189
industries to diversify their tourism and—with the help of a regional

innovation agency—to develop new industries, including some with STI-
type innovation from universities and research centres. These could be
located outside Algarve if necessary. However, it was a very horizontal
set of aspirations.
Centro and Norte already had high related variety scores, as judged
by the Portuguese National Research Council (FCT 2013), so they used
matrix methods to identify crossover innovation opportunities and pro-
jects in biotechnology, flexible manufacturing systems, robotics, renew-
ables and footwear, among other intersecting innovation platforms. In
the last two cases, their strategies were accepted by the state, which
retained control of project evaluation (dependent on the EU Regional
Operational Programmes into which RIS3 allocations fit). But for Al-
garve, and other regions, the state’s innovation ministries and agencies
opposed their diversity plans on grounds of lack of critical mass, thus
condemning Algarve to remain specialised but not especially smartly
so. A better governance model for regional innovation was approved,
but it was not a full-blooded regional innovation agency.
THE STUDIED REGIONS AND EVEN, TO SOME

EXTENT, THE STATE, IGNORED THE PRECEPTS OF
SPECIALISATION AND PURSUED THE COMMON-SENSE
POTENTIAL OF OPTIMISING THEIR REGIONAL
DIVERSITY TO PROMOTE REGIONAL INNOVATION
So, the adoption of a specialisationist model in the field of ERDF

allocations via ROPs to subsidise regional innovation and growth
was rejected by Portugal’s regions and even in limited ways by the
state. In its stead, diverse regions either sought to initiate or, where
conditions were more evolved, consolidate growth opportunities and
gains by adopting regional diversity through building on the concept
of related variety and fashioning transversal innovation policies. That
this was given approval in the RIS3 documentation promoting smart
specialisation merely underlies the conceptual confusion and spatial
myopia of the EU and its Commission. This shows that the EU and
even its member-states are slow-moving, backward-thinking policy
action entities.
Even weak regional administrations, such as those anatomised above,
can respond and, in limited ways, even anticipate needed economic
190
policy actions more swiftly. However, at the edge of chaos, as under-

stood in EEG and complexity theory, where change is imminent or
unavoidable, “fortune favours the prepared mind”, as Louis Pasteur
saw it. Centro and Norte saw clear advantages in exploiting innovation
opportunities arising from past R&D infrastructural investments, and
their sense-making, crossover thinking was hard to oppose by the state.
Algarve had great difficulty extracting its future innovation profile from
the specialised sun and beach frame endowed upon it by its state and
fellow regions. The key problem lies in institutional failure by big, slow
organisations, like the EU and member states, to leave their neoclas-
sical industrial economic comfort zone and embrace the full meaning
of innovation, which is recombinant, interactive and unconfined to a
sector or even a cluster. Rather, innovation is geographical, interactive
and based on crossover innovation at interfaces.
Conclusions
It is clear that the transversality perspective can be considered success-

ful at path-breaking in three significant dimensions. First, the theoreti-
cal sophistication of its approach places its evolutionary economic geog-
raphy approach in a primary position, from the viewpoint of advanced
regional analysis. This utilises evolutionary concepts from economic
geography, complexity and resilience theory, such as the multi-level
perspective, complex adaptive systems, external shocks and internal
perturbances, preadaptation, adjacency, cognitive reversal, relatedness,
proximity, path dependence and transversality, in a coherent, innovative
and intellectually penetrative way. Much further research is likely to fol-
low into the explanatory validity of this non-reductionist, non-predictive
evolutionary framework. Kauffman (2008) presents this perspective
as “lawless” in the sense that it is beyond the paradigm exemplar of
neoclassicism, which derives mechanistically from physics. Since life
forms cannot be predicted, this approach escapes the strictures of that
reductionist frame.
The second major contribution of the findings on knowledge flows and
innovation for the future concern its critical reflections on numerous
inadequately scrutinised aspects of innovation theory. Accordingly, in-
novation is now better specified as the key element of any evolutionary
growth model. Finally, the theoretical and empirical results have shown
191
how relatedness and transversality are practised in the actualité and

may be empirically observed by firms and policy agencies seeking or
charged with enhancing business and regional innovation. This strongly
suggests the validity of Kurt Lewin’s observation that “there is nothing
so practical as a good theory”.
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E UR O P E AND I TS NATI O NS : P O LI TI C S , SOCIETY A N D CU LTU R E
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201
FRO M NATI O N- STATES TO M EMB ER STATES
CHRISTOPHER BICKERTON What is a member state exactly and what

is University Lecturer in politics
does it look like? What are the factors that
at the department of politics and
international studies (POLIS) at have driven this shift from nation-state to
the University of Cambridge and member state? Does the current crisis of the
an Official Fellow in politics at
Queens’ College, Cambridge. He EU signal an end to member statehood and
obtained his PhD from St John’s a return to a Europe of nation-states or is it
College, Oxford in 2008 and since
then has held teaching positions a confirmation of it? This chapter will argue
at Oxford, the University of Am- that member states are characterized by a
sterdam and Sciences Po, Paris.
He has published two books and growing distance between governments and
has written columns and articles their own societies. This growing gap be-
for the Financial Times, New York
Times, Wall Street Journal, The tween political elites and their own societies
Guardian and the Monde Diplo- lies behind the growth of both populism and
matique. He is the co-founder of
the political economy blog, The technocracy as powerful political phenomena
Current Moment. in contemporary European politics.
202
FROM NATION-STATES TO MEMBER

STATES: EUROPEAN INTEGRATION AS
STATE TRANSFORMATION
Introduction
The European Union remains a mystery to many observers. It is nei-

ther a fully-fledged European state nor is it simply a loose federation of
cooperating national states. The EU is often described as coercive in
its dealings with member states, and yet it has no coercive power of its
own. Some think of it as a German-dominated body, and yet Germany
seeks to devolve ever greater amounts of its own sovereignty to the EU.
Citizens and scholars alike are often confused when they try to describe
this political institution. It is often negatively defined in terms of what
it is not. Historical analogies, from the antebellum United States to the
Hapsburg Empire, are used to define it with limited success.
THE EU REMAINS THE WORK OF

STATES AND IS NOT ITSELF A SUPRANATIONAL
EUROPEAN STATE
This chapter argues that the best way to think of the EU is as a union
of member states. By this, I mean that the EU is an organization dom-
inated by its members; it remains the work of states and is not itself a
supranational European state. However, its members are not typical
nation-states of the late 19th century: egotistical, war-mongering, ter-
ritorially greedy, jingoistic and imperialist. Rather, these are member
states, whose power and authority are constituted in their relations
with one another at the EU level (Bickerton 2012: 51-73). By thinking of
the EU as a union of member states, we are able to explain its centrality
to national political life but also its institutional weakness.
This chapter takes the Eurozone crisis as a case study of the idea
that the EU is a union of member states. I argue that the failure of
Syriza in its negotiations with its creditors, along with the behaviour
of the Eurogroup in this matter, shed light on the nature of the EU. This
203
episode also raises questions about the relationship between the EU

and democracy. This chapter argues that the EU does not suppress
national democracy, but rather, as the European states have evolved
from nation-states to member states, democratic representation at the
national level has been squeezed out, leaving only populist protest and
technocratic responses by national executives acting in concert at the
European level.
A European Union of member states
The EU is a difficult entity to pin down for scholars and citizens alike,
and so it is often defined in terms of what it is not. Many supporters
of the EU lament that it is not yet a federal state, even though it has
managed to accumulate considerable powers over the recent decades.
Former president of the European Commission, Jose Manuel Barroso,
referred to the EU as “the first non-imperial empire”: one that asserted
power peacefully, through its rules and regulations, and not militarily,
through invasion and war. The trick here was the qualifying adjective of
“non-imperial”, suggesting that although the EU is not an empire, calling
it so helps us understand something about it (see also, Zielonka 2006).
CONTEMPORARY EUROPE IS CHARACTERIZED

BY, IF ANYTHING, THE DISINTEGRATION OF NATIONAL
IDENTITIES AND NATIONAL SENTIMENT
The EU is often defined by analogy and described as being “like”

something else. It is often compared to the antebellum United States,
in which individual states retained most of their sovereignty but were
linked to one another through articles of confederation and then more
firmly through a federal constitution (Glencross 2009). The EU has no
such constitution, but many suggested the 2005 Treaty—voted down by
French and Dutch voters and then resurrected four years later as the
Lisbon Treaty through an impressive feat of legal tinkering—was like a
constitution. It was thus called the Constitutional Treaty. When asked
whether it was a constitution or just a treaty, French President Jacques
Chirac cannily replied: “it is legally a treaty, but politically a constitution”.
There are great difficulties in comparing the EU to the antebellum
United States. The historical movement of the 1790s, which continued
204
into the early decades of the 19th century, was centred on nation-build-
ing. Indeed, this was the very beginning of the nationalist age that was
to culminate in the First World War of 1914 to 1918. The American and
French Revolutions confirmed politics as the secular basis for the state’s
authority, in contrast to the dynastic and religious understandings of
legitimacy that had prevailed up until then (Bayly 2004). Central to the
work of the Federalist authors in the United States—Madison, Hamilton
and Jay—was the idea of the “American people” as the basis and the au-
thorizing logic for the federal constitution. In his travels, a few decades
later, de Tocqueville noticed how prevalent the concept of the “American
people” was to political life in the United States (Tocqueville 2004).
Present day Europe is not characterized by this movement towards
national consolidation or towards a pan-European nation. Those vocal
nationalisms that do exist tend to assert themselves against the idea of
the nation-state, as in Scotland and Catalonia. Contemporary Europe
is characterized by, if anything, the disintegration of national identities
and national sentiment. The steady dismantling of the United King-
dom is a case point. Thus, it is very difficult to imagine that the EU is
characterized by the reappearance of this sentiment at the European
level. We are simply not living in an age where loose federal unions are
being forged into stronger federal states, as occurred in the US, in the
course of the 19th century, or in Germany, at the end of the 19th century.
When we try to define the European Union, it is useful to look at ex-
actly what it is. The EU is an aggregate of its institutions. These include
the European Commission, the European Parliament, the Council of
Ministers and the European Council. The Commission has the role of
initiating proposals. The European Parliament and the Council of Min-
isters share the authority to decide whether or not they accept those
proposals and their amendments. They often work together in secret
to respond to Commission initiatives (Reh et al. 2013). The European
Council has a more complicated role. It sets the general direction of the
EU but is also the source of its own proposals and has become more and
more involved in the day-to-day affairs of the EU (Puetter 2015). It sits
atop the other institutions as it is made up of the heads of government
of the member states of the EU.
The European Parliament claims to represent the European people
as a whole, but this claim competes with the individual national parlia-
ments, for whom Europe is made up of its national populations which
they represent. The European Commission’s power is as a bureaucracy
205
and as a body charged with tasks given to it by member states. The

Council of Ministers is what its name describes: meetings of national
government ministers that are organized along policy lines—agriculture,
fisheries and others. A final institution is the European Court of Justice.
This body is tasked with making judgements about whether individual
cases brought before it represent breaches of European law. Both gov-
ernments and citizens can bring cases to the European Court of Justice.
There is little from this institutional arrangement to suggest the for-
mation of a single European state. Power still lies with national govern-
ments and national bureaucracies, although that power is exercised
in concert with the EU’s institutions. The EU is a coming together of
European states more than it is a transcendence of them (Bickerton et
al. 2015). The reason why it appears to us as more than that is because
of the nature of the European states themselves. Rather than being na-
tion-states that jealously guard their national interests and clash with
one another along national lines, European states are member states,
and their membership in the EU plays a critical role in their existence.
In particular, national governments and national bureaucracies see
their authority as derived from their belonging to the EU policy-mak-
ing process. Their power is therefore constituted in a horizontal way
through the relations they enjoy with other governments in the EU, as
well as in the vertical relationship of representation between a govern-
ment and its own people.
Presented in this way, we can understand an important integration
paradox that has come to characterize European integration over the
last thirty years. Since the signing of the Maastricht Treaty in 1992,
European integration has moved forward in leaps and bounds. In addi-
tion to monetary union, the EU has also expanded into many new policy
areas: foreign policy, police and border issues, justice, social policy and
employment policy. However, this expansion has not come with the
transfer of powers from national governments to European institutions.
Over the same period, key EU institutions, like the Commission, have
seen their powers reduced. We have therefore seen a form of integra-
tion without supranationalism, which can be explained by the fact that
the EU is a union of member states rather than a supranational state
of its own (Bickerton et al. 2015: 51-72). Member state governments
are the leading agents of integration, not the traditional supranational
institutions like the Commission and the Court.
206
The concept of the member state
The term member state is one of the most popular in European studies.
Whether one looks at the legal field, sociology or the political science
of European integration, member statehood is thought of as a juridical
title, which is given to a nation-state when it joins the EU. Were a state to
leave the EU, it would have this title revoked. What this chapter suggests
is that in addition to treating it as a legal title, it makes sense also to
think of member statehood as a distinctive and standalone form of state.
IT IS POSSIBLE TO IDENTIFY MEMBER

STATES FOR ITS ORGANIZATIONAL ARRANGEMENTS,
ITS POLITICAL DISCOURSE AND ITS FORMS
OF POLITICAL CONFLICT
What exactly do member states “look” like? How can one differentiate
a member state from other forms of statehood? It is possible to identify
member states along three lines. One is the internal organizational ar-
rangements of member states. A second is the political discourse used
by member state governments to legitimize their authority. The third
is the forms of political conflict that structure member state national
life. This section will look at these three in turn.
Internal organizational arrangements
The internal organizational arrangements of member states have a

number of characteristics. One is the dominance of the executive. An-
other is the proliferation of non-majoritarian institutions to which pow-
ers are delegated by central government. A third is the lack of mediating
institutions that “stand in” between the state and domestic society.
The executive dominance comes from the fact that policymaking is be-
ing undertaken less by parliaments as legislators and more by executives
as negotiators. International agreements tend to empower executives
in so far as they conduct the negotiations, set the terms for them, and
are able to select which domestic interests they want to represent and
which to leave aside (Putnam 1988). EU policymaking empowers national
executives in the same way, particularly with the rise of the European
Council as the dominant EU institution and its direct involvement in
the ever-increasing numbers of policy areas. The flow of information is
207
top-down, with the executive informing parliaments of the outcomes of

negotiations and presenting legislative packages not to be debated but
to be voted on as finished products.
IN MANY WAYS, THE EU ITSELF

HAS BECOME THE NEW FORM OF
MEDIATION BETWEEN THE
STATE AND SOCIETY
An extreme case of executive dominance existed during the expansion

of the EU to Eastern Europe. In order to manage the negotiations with
the European Commission, applicant states created powerful Europe-
an offices that were often directly linked to prime ministerial cabinets.
This became the core negotiating team, with the best people and re-
sources channelled into it. Other parts of the state, both political and
bureaucratic, suffered, especially national parliaments which ended
up rubber stamping decisions made by their executive in union with
officials from the European Commission (Bickerton 2009).
The proliferation of non-majoritarian institutions reflects the fact
that member states prefer to rule through external frameworks, that
is, frameworks that are external to political contestation and especially
external to the political party systems. In the same way that EU institu-
tions sit outside of political party conflict, many other key institutions
of member state governance do so as well. Central banks, and thus
monetary policy, are independent of political competition. This is not
only true of Eurozone member states, which have delegated monetary
policy to the European Central Bank, but also non-Eurozone member
states. The Bank of England, for instance, is independent of the UK
government, as is the Swedish Riksbank, whose independence from
the Swedish Rikstag (parliament) has a clear, statutory basis. Rather
than thinking of EU institutions as distinctive or unique, we can thus
see them as part of a spectrum of external authorities, which national
governments use as a way to exercise their own powers at a distance
from national political contestation. Indeed, compared to the scope and
range of non-majoritarian institutions at the domestic level, the EU is
only the tip of this particular iceberg.
A third institutional feature of member statehood is the weakness of
bodies that mediate between the state and civil society. The state-society
relationship is traditionally conceived of as a relationship that mediated
208
Mario Monti in a press conference in Brussels.
through workers’ and business organizations, political parties and par-

ticular frameworks, such as corporatism or pluralism (Berger 1982). The
relationship is therefore normally a thick one, marked above all by the
role played by political parties in “standing in” between the state and
civil society. European states of recent decades have been marked by a
distinct lack of mediation. In part, this comes from the disrepute of the
party system, but it also has to do with a more general historical trend
towards the unravelling of more complex forms of state-society relations.
An extreme instance of unmediated state-society relations arose recently
in Italy, where the technocratic Monti government enjoyed neither the
support of the political parties nor the support of social groups in Italy
(Culpepper 2014).
Of course, one can also speak of a transformation in mediation rath-
er than an absolute decline. Indeed, in many ways, the EU itself has
become the new form of mediation. State-society relations are thus
mediated through institutions and bodies external to the state and so-
ciety; this is the change which has taken place. A stark example of this
is Greece, where the Troika of creditors have played a direct role in the
everyday running of the Greek government. Relations between Greek
citizens and their governments run through Frankfurt, Brussels and
Washington.
209
Legitimizing discourses
The typical legitimizing language for the exercise of power by national

governments is that of popular sovereignty and representation. This
has been true at least since the emergence of the modern secular state
in the late 18th century and its consolidation as a national actor in the
19th century. State power is exercised in the name of the people. This
holds true across variations in political regime; the differences lie not
in invoking the people’s right to rule but how the identity and will of
the people is determined.
The legitimizing discourses of member statehood are different. Pop-
ular sovereignty is treated more as a problem or danger to be con-
tained than it is a source of final authority. The preferred legitimizing
discourse is that of wider regional and international obligations and
the more abstract language of collectively agreed rules whose validity
holds regardless of political life and its multiple competing interests.
Specifically, what constitutes legitimacy here is the sense of moral su-
periority associated with an ability to limit the national will in the ab-
sence of external coercion. Joseph Weiler (2003) has written on this
particular legitimizing discourse and calls it “constitutional tolerance”.
In his words,
Constitutional actors in the Member States [national executives, legisla-

tors and officials] accept the European constitutional discipline not be-
cause, as a matter of legal doctrine, as is the case in the federal state, they
are subordinate to a higher sovereignty and authority attaching to norms
validated by the federal people, the constitutional demos. They accept it as
an autonomous voluntary act, an act endlessly renewed on each occasion, of
subordination, in the discrete areas governed by Europe, to a norm which
is the aggregate expression of other wills, other political identities, other
political communities (Weiler 2003:21, italics added).
Simply speaking, we can say that whereas legitimizing discourses of

the nation-state rested upon the idea of supremacy of the national will,
the legitimizing discourses of the member state rest upon the idea of its
subordination or submission. The idea of constraining national power
through an act of self-limitation thus becomes the most important legiti-
mizing discourse of member statehood and, therefore, of EU integration
more generally. As Paul Magnette (2000) once put it, Europe, today, is
all about “taming the sovereign”.
210
Modes of political conflict
Member states are characterized by modes of political conflict that focus

on contesting processes rather than outcomes. Within member states,
the process of aggregating preferences has become the subject of political
contestation. As a result, political life is devoted as much to challenges
to governmental authority as to the enactment of specific policy pro-
grammes. If we take as an example the protests which occurred across
Europe in 2011 and 2012, from “Occupy London” to the Indignados in
Spain, we see that the concern of protestors was, in part, with the iniqui-
ties of financial capitalism and the way in which European governments
had bailed out their banks. But the protestors were also driven by scep-
ticism and disenchantment with national democracy as a process.
The political life of member states is thus based both on traditional
cleavages, such as Left versus Right, and newer forms of political con-
flict, in which political elites are identified as a monolithic group and
denounced for their self-interested behaviour and corruption. The lan-
guage of la casta is used by Beppe Grillo, in Italy, and by Pablo Iglesias,
in Spain. Indeed, the very definition of populism is to define the political
field as a struggle between the virtuous people and the corrupt national
elite. The prominence of populism in European politics is thus evidence
of the way the political process itself—not just its outcomes—has be-
come politicized.
Member statehood and the Greek crisis
In order to demonstrate the relevance of the member state analysis to

the idea of the European Union and European integration today, this
chapter takes the Greek crisis as an example. There are a number of
ways in which the member state analysis helps us understand the key
features of this crisis, its place within the wider European integration
process and its present resolution. At the time of writing, Greece had
finalized a third bail-out agreement with the EU to the tune of 86 billion
Euros, to be disbursed over three years in exchange for significant and
far-reaching internal reforms. This section will focus on two aspects of
the Greek crisis: why Syriza failed in its negotiations with the Troika and
what Yannis Varoufakis’ tenure as finance minister has revealed about the
Eurogroup and the nature of European monetary union more generally.
211
The failure of Syriza
Viewing the EU as a union of member states helps us understand Syr-

iza’s failure after winning the Greek elections in January 2015 (see also,
Jones 2015). Syriza won just over 36% of the vote, leaving it short of
forming a parliamentary majority on its own. It entered into a coalition
with Independent Greeks, a right-wing party that was also opposed to
the bail-out deal agreed to by previous Greek governments.
The incoming strategy of the Prime Minister, Alexis Tsipras, and
his finance minister, Yannis Varoufakis, was to argue for change from
within the single currency union. Their language was strongly pro-Eu-
ropean, and they argued for a different policy mix for the Euro, rath-
er than its abolition or for Grexit. Indeed, it was made very clear by
both figures that Greece did not want to leave the Euro but only to
change the existing terms of its deal with its creditors. This “change
from within” strategy relied on the existence of real sympathy for new
policies within the Eurozone, most notably some sort of debt mutual-
isation mechanism and debt relief for Greece—policies which signalled
the formation of an embryonic fiscal union. These were policies that
would have required more supranationalisation at the European level
and more “burden-sharing” across borders.
What Tspiras and Varoufakis ran up against was an EU whose gov-
erning logic was not that of ever-increasing supranationalisation of
macro-economic policy. Rather, the EU has for some time been moving
in a “new intergovernmental” direction, with member states at the
realm. In monetary policy, the focus is on rules and the importance
of these rules in constraining the behaviour of national governments.
This implies greater coordination between national governments but
no sharing of the debt burden and no “solidarity” of the kind that Varo-
ufakis was demanding.
Syriza also underestimated the extent to which other member state
governments identified with these collectively agreed frameworks rath-
er than with any ideological project of Left or Right (Gourevitch 2015).
One might have expected Syriza to be able to rally other social demo-
cratic parties in power across Europe, most notably in Germany, France
and Italy. Had there been a strong position in favour of a revised and
less “austerity-focused” deal for Greece on the part of Germany’s Social
Democrats, then Merkel and Schäuble would have found their negotiat-
ing hand much weakened. Schäuble’s strength and determination was
212
in some part a reflection of the absence of any challenge to his views

within Germany. And yet, the SPD is in coalition with the Christian
Democrats, and Sigmar Gabriel, the SPD leader, is Vice-Chancellor.
Both Italy and France, supportive of Greece at the very end when
“Grexit” seemed a real possibility, did not support Greece as ideological
partners. Their defence of a more socially-friendly deal for Greece was
weak in comparison to their support for honouring past agreements and
adhering to a rule-bound framework. In an interview, Varoufakis said
that French finance minister, Michel Sapin, was personally very sup-
portive of the Greek attempt to transform the substance of the bailout
deal. Publicly, however, Sapin refused to back Varoufakis and instead
urged Greece to support the conditions being offered by its creditors
(Parker 2015).
The real sins of Varoufakis
One feature of the Greek crisis was the short-lived presence of the
Greek finance minister, Yannis Varoufakis, within the Eurogroup. Varo-
ufakis was tasked by Tspiras to lead negotiations with creditors, and
he defended his government’s position in the Eurogroup. Much ink has
been spilt discussing Varoufakis, in particular his flamboyance and lack
of respect for typical political and diplomatic protocol. However, if we
want to explain why Varoufakis became a persona non grata for the
Eurogroup, one has to understand how he broke many of its rules and
violated its etiquette as an institution (Bickerton 2015).
In terms of the substance, there was some overlap between Varou-
fakis and the creditors. Many accepted, at least implicitly, that Greece’s
debt obligations would never be paid back in full and that some sort
of debt relief was inevitable. There was also sympathy for Syriza’s
statements about tackling the oligarchic nature of the Greek economy.
Many, indeed, saw this—as much as anything else—as the real obstacle
to growth in Greece and welcomed the possibility of tackling these
major figures, whose influence far outweighed their contribution to
the Greek economy.
However, Varoufakis did not negotiate in the manner expected with-
in the Eurogroup. Viewed through a member state analysis, where
state-society relations are distended to the point of having closer
identification between national elites at the European level than be-
tween those elites and their own domestic societies, the Eurogroup is
213
an institution that powerfully demonstrates this separation. Within

the Eurogroup, ministers think of the discussions as being technical in
nature, and there is a strong problem-solving and, therefore, consensual
nature to its deliberations. Participants think of themselves as sharing
a basic outlook with disagreements relegated to matters of detail. The
Eurogroup is also a place where those with difficulties achieving do-
mestic results come for support. This shared outlook prevails over the
specific national affiliations of each finance minister.
In contrast to all of this, Varoufakis understood his participation in
the Eurogroup as that of a Greek finance minister, bringing to the table
the demands of his people. He did not leave his national identity at the
door but wore it as a badge of honour. Any important issues on which he
needed to compromise were brought back to Athens to form the basis
of cabinet and party votes. He even began to publicize his positions
before Eurogroup meetings and his interpretation of the proceedings
afterwards. Varoufakis thus injected into the Eurogroup the vertical
principle of direct representation that challenged the horizontal prin-
ciple of elite identification, which animates the institution. He certainly
also annoyed participants by patronising them, using his authority as
an academic to make his case for Euro-reform. He was not at all atten-
tive to building political coalitions, and one wonders whether he was
playing a “long game” at all or instead preferred to shine brightly for
a while and then disappear with a bang. This political naivety, one sus-
pects, was not fatal, however. It was his violation of Eurogroup etiquette
that made him a persona non grata.
Conclusion: Populism, technocracy and the future of Europe
This chapter has argued that European integration needs to be under-

stood as a process of state transformation. National states have been
transformed, and what we see in the EU is the institutional expression
of these domestic level changes. It is for this reason that the EU seems
so omnipresent but is also institutionally weak. The specific nature of
the transformation has been labelled here as a shift from nation-states
to member states. This describes a change in state-society relations,
where a vertical relationship of representation and authorization, which
identifies people as the basis of national power, is increasingly being
replaced by a horizontal notion of state power and authority. In this
214
conception, participation in transnational networks of governance such

as the EU are not constraints on national power but constitutive of it.
The result of this shift from nation-state to member state, and the
effect on the way state power is constituted, is that political life at the
national level is no longer based on a combination of democratic con-
testation and governmental effectiveness. Political parties have been,
since the beginning of the 20th century at least, the main vehicles within
European democracies for the reconciliation of the competing demands
of representation and responsible government (Mair 2009). Member
statehood, based as it is on a thinning of the state-society relationship
to the point that mediating bodies, like parties, are increasingly mar-
ginalized, generates a kind of political life that is unable to combine
representation with responsibility. Instead, the two have become un-
coupled and appear as opposites that challenge one another: populism,
on the one hand, and technocracy, on the other. It is the people versus
the elites, rather than competing representations of the popular good
and its realization through concrete sets of policies.
RELATED ARTICLES:
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Democracies: Democracy at Increasing Risk in the Eurozone Crisis
From the “Imagined” to the “Post-bureaucratic”

Region: The Search for Europe in Higher Education Policy
215
T H E I M PAC T OF EURO P EAN I NTEGRATI O N ON N ATION A L DEMOCR ACIES
VIVIEN ANN SCHMIDT European integration has become an increasing

is Jean Monnet Professor of
challenge to national democracies. As more
European Integration, Pro-
fessor of International Rela- and more policy decisions are taken at the
tions in the Pardee School of EU level or removed to technocratic bodies,
Global Affairs, and Professor
of Political Science at Boston national politics has been gradually emptied
University, where she is also of substance. The Eurozone crisis has made
Director of BU’s Center for the
Study of Europe. Some of her such matters worse not only because of the
recent books include Resilient economics and politics of hard times, but also
Liberalism in Europe’s Political
Economy (co-edited, Cambridge because EU governance processes and policies
2013), Democracy in Europe have themselves become less ‘‘democratic’’.
(Oxford 2006), and The Futures
of European Capitalism (Oxford How can national democracies be reinvigorated
2002). She is currently at work while rebalancing the EU’s ‘‘democracy’’ in ways
on a book on democratic legiti-
macy and the Eurozone crisis. that enable both levels to interact productively
within the new EU realities?
216
THE IMPACT OF EUROPEAN INTEGRA-

TION ON NATIONAL DEMOCRACIES:
DEMOCRACY AT INCREASING RISK IN
THE EUROZONE CRISIS
Introduction
European integration has long had an enhancing effect on Europe’s

national democracies. In addition to meeting its initial commitments
to peace and prosperity, the European Union has generated policies to
address problems that national governments cannot resolve effectively
on their own in an increasingly globalized world. However, while deep-
ening European integration has benefited the member states of the
European Union in countless ways, it has also had some unanticipated
side effects on their national democracies.
THE PROBLEM FOR NATIONAL

DEMOCRACIES IS NOT THAT EU POLICIES HAVE
ENCROACHED ON NATIONAL ONES, BUT THAT
CITIZENS HAVE HAD LITTLE DIRECT SAY
As decision-making in policy area after policy area has moved up to

the EU level, European integration has increasingly encroached on is-
sues at the very heart of national sovereignty and identity. Money and
monetary policy, economic organization and labor markets, borders
and immigration, public services and even welfare guarantees all in-
creasingly come under EU policies or prescriptions. The problem for
national democracies is not so much that EU policies have encroached
on national ones, however, but that citizens have had little direct say
over these matters, let alone engagement in EU-wide political debates
about the policies. The fragmented nature of European “democracy”
has meant that while the policies are decided at the EU level, generally
in an apolitical or technocratic manner, politics remains national. Na-
tional democracies as a result have increasingly become the domain
of “politics without policy” whereas the EU level appears as “policy
217
ithout politics”1 — however “political” (or politically charged) the pol-

w
icies may actually be, in particular in the Eurozone crisis.
As national citizens have had less and less direct influence over the
policies that affect them the most, they have expressed their concerns
at the only level at which they are able: the national. Citizens have
increasingly made their displeasure known through protests and the
ballot box, leading to the rise of the populist extremes and the increas-
ing turnover of sitting governments. National governments, moreover,
have found themselves caught more and more between citizens’ elec-
toral expectations and the EU’s collectively agreed rules and decisions.
As a result, national governments confront dual challenges: from
populism at the national level and from technocracy at the EU level.
But technocracy is itself a creature of the governments themselves. As
member states in coordinated intergovernmental EU agreements, they
have increasingly delegated implementation and oversight powers to
supranational authorities, such as the EU Commission, the European
Central Bank, and a proliferating number of regulatory agencies. Again,
although pooling their authority to delegate responsibility may have
been the best way to meet the global challenges, it has also further re-
duced governments’ national margins of manoeuver, in particular with
regard to the demands of large numbers of their own citizens.
The Eurozone crisis has made such matters worse not only because of
the politics and economics of hard times, but also because of the EU’s
economic policies and governance processes in response to the crisis.
These have only intensified the democratic challenges for citizens and
their governments alike, as more and more decisions have been taken
through EU level intergovernmental coordination and supranational
delegation.2 Citizens have felt their diminished influence all the more
acutely, resulting in a precipitous loss of trust in both their national
governments and in the EU, which has also manifested itself in even
greater political volatility.
Note, however, that the impact of the EU, in particular in the Euro-
zone crisis, has been highly differentiated. Not only have citizens’ reac-
tions to the EU and the Eurozone crisis been very different across the
member states, but national democracies have also had very different
experiences of the EU and the Eurozone crisis. While some national
1 See Schmidt 2006, Ch. 1, 4.

2 Fabbrini 2013; Dehousse 2015.
218
democracies have been greatly undermined, others have been empow-

ered. Greece under the latest bailout agreement is arguably the most
extreme example of the hollowing out of national democracy, whereas
Germany—given both its position on the Council and the role of its
Constitutional Court in vetting EU legislation—has arguably been best
able to ring-fence its own national democracy.
The question for the EU, then, is how can it manage to recapture the
hearts and minds of all of its citizens across its member states? And
how can it rebalance EU decision-making to make it more generally
democratic? The question for national governments is, how can they
retain enough control to satisfy the demands of national democracy
without undermining the goals of European integration?
European Integration and National Democracy
European integration has, all in all, been a major boon for the EU’s mem-
ber state democracies. Integration has enabled the comparatively small
countries of Europe to stand together as a supranational region, thereby
giving them international scale and scope. It has equally enabled them to
stand up to the challenges of economic globalization in an increasingly
interdependent and competitive world economic system, by regionalizing
their economies through a single market and a common currency. But the
very integration processes that have served to enhance the substantive
quality of member states’ democracies, by giving them peace and pros-
perity at home along with extra heft as a regional power and economic
authority in the international arena, have at the same time impoverished
the procedural quality and political dynamics of their democracies.
European Integration and Democracy
European integration has been a democratically negotiated process

among member states, as they slowly and incrementally pooled sover-
eignty, shared authority, and created joint control in policy area after
policy area and institution after institution. The customs union was
followed by the Single Market, Schengen, and European Monetary
Union (EMU); the Court of Justice of the EU (ECJ) gained suprem-
acy and direct effect; the European Central Bank (ECB) was given
control over money, monetary policy, and banks most recently; and
219
the Commission increased its supranational powers of negotiation,

regulation and oversight in areas such as international trade negotia-
tion, financial markets, and the EMU via the European Semester for
budgetary oversight.
The reduction of national democracy has been an inadvertent by-
product of such increasing integration, as more and more decisions are
taken at the EU level rather than the national. This has thereby emptied
national democratic politics of substance without at the same time cre-
ating a fully democratic body politic at the EU level as a replacement.
The lack of citizen access to EU decision-making has only marginally
been remedied by the incremental rise over time in the powers of the
European Parliament (EP) as the direct voice of the people, in particular
through its increasing influence via co-decision procedures with the
Council and Commission and by measures for direct citizen access,
such as the EU ombudsman and the citizen’s initiative petition. In the
case of the EP, any claims that it is the most representative of EU bodies
because of its members’ direct election “by the people” are weakened
by the high levels of abstention in EP elections and the second order
nature of such elections.3 Moreover, in the Eurozone crisis, any such
claims to representativeness are additionally weakened by the fact that
the EP has had by treaty very little remit in EMU governance, although
this changed somewhat over the course of the crisis.
Equally problematic are any member state leaders’ claims that their
indirect election to the European Council by their national citizens
makes the European Council the most representative forum, and them-
selves the most legitimate to legislate for all EU citizens,4 as President
Sarkozy seemed to insist at the height of the Eurozone crisis when he
defined a more democratic Europe as “a Europe in which its political
leaders decide”5 and Chancellor Merkel appeared to assume when she
explicitly commended the new “Union Method.”6 Not least is the fact
that member state leaders can only legitimately agree to impose aus-
terity measures for the citizens who elected them, not on others—which
they nevertheless did for countries in need of bailouts during the Eu-
rozone crisis. But even if it were legitimate for member states to agree
to legally binding austerity measures for everyone, delegating to their
3 Franklin, and van der Eijk 2007.

4 Schmidt 2015a.
5 In a speech in Toulon (Dec. 1, 2011).
6 In a speech at the College of Europe in Bruges (Nov. 2, 2010).
220
agent (i.e., the Commission) the discretionary authority to implement

such rules is not similarly legitimate, given the necessarily ad hoc na-
ture of the specific application of those rules to any given country.7
Additionally, assuming that the Council serves as a representative
forum fails to deal with the fact that during the Eurozone crisis, it acted
initially more as a bargaining arena in which one member state (Germa-
ny) exercised the greatest influence. Although academic scholarship on
THE LACK OF CITIZEN ACCESS TO

DECISION-MAKING HAS BEEN PARTLY REMEDIED
BY THE INCREMENTAL RISE IN THE POWERS OF
THE EUROPEAN PARLIAMENT
the Council has suggested that the deliberative mode prevails over hard
bargaining, even where qualified majority voting occurs, because of the
focus on consensus,8 in the Eurozone crisis, deliberation has occurred
in the shadow of Germany.9 In the months leading up to the May 2010
bailout of Greece, Germany, as the strongest economically and the most
opposed to taking a decision, ensured that no decision could be taken,
given the unanimity rule, until Chancellor Merkel finally agreed in or-
der to “save the euro.”10 Germany’s predominance has manifested itself
not only through that country’s sway in the Council decision-making
process, but also in coordination with coalitional allies. It has also been
evident through German leaders’ ability to determine the analysis of
the Eurozone crisis and set the terms for the response.
Despite the reality of a crisis that resulted from an explosion of private
debt and a structure of the euro that had produced increasing diver-
gences rather than the expected convergence between countries,11 the
crisis was framed as one of public debt rather than private—by reading
off the Greek case—and diagnosed as behavioral rather than structural,
from not following the rules, which was again only true for Greece (and
Germany and France, in the mid 2000s). As a result, the remedies all fo-
cused on “governing by the rules and ruling by the numbers,”12 that is, on
7 Scharpf 2013, pp. 138-9.

8 In a speech in Toulon (Dec. 1, 2011).
9 Novak 2010, Puetter 2012.
10 See Schmidt 2015a; Jacoby 2015.
11 S
chelkle, 2015; Jones, 2015.
12 See, e.g., De Grauwe and Ji 2012; Enderlein et al. 2012; De Grauwe 2013; Blyth 2013.
221
reinforcing the rules and more strictly specifying the numbers through
the various legislative packages and intergovernmental pacts (Six-Pack,
Two-Pack, and Fiscal Compact), while increasing budgetary oversight
through the Commission-led process known as the “European Semes-
ter.” EU leaders in the European Council spent their time agreeing to
restrictive rules and sanctions, rather than finding lasting solutions to
the incomplete risk pool and insurance mechanism that constituted
EMU and that had been put in place more by default than design. 13
What was in fact needed was greater solidarity through some form of
mutualization of debt (e.g., Eurobonds) or macroeconomic stabilizers
(e.g., an EU-wide unemployment fund).14 But Germany was adamantly
opposed to any such “transfer union” from the very start.
THE GERMAN CONSTITUTIONAL COURT IS

THE ONLY NATIONAL COURT TO ASSERT ITS
RIGHT TO VET SUCH EU DECISIONS, CASTING
UNCERTAINTY ON THOSE DECISIONS
Finally, Germany’s over-sized influence in the EU also stems from

the features of its own national democracy, in which the Constitutional
Court has played a major role in deciding what is democratically legiti-
mate for Germany and the EU. The Court has thereby served as another
power resource for German leaders, who frequently invoked the Con-
stitutional Court to delay decisions, as they did with regard to bailing
out Greece. But more importantly, the German Constitutional Court
has also inserted itself repeatedly into EU matters, most notably with
its hearings on the ECB’s “unorthodox” monetary policies, in particular
with regard to “OMT” (open monetary transactions) through which
ECB President Draghi had promised to “do whatever it takes” to save
the euro in July 2012, which had stopped market attacks on member
state debt. Such judicial activism is in and of itself perfectly appropriate
by the standards of national democracies. But it is problematic for EU
governance at the very least in terms of its efficiency: What if all mem-
ber states’ constitutional courts were to do the same?15 Most significant
here regarding our concerns is that the German Constitutional Court
13 Schelkle 2015; Jones 2015.

14 Claessens et al. 2012.
15 Dehousse, 2011.
222
Members of the European Parliament voting

during a session on September 2015.
is the only national court to assert its right to vet such EU decisions,
with the effect of casting uncertainty on those decisions.
Democratic Governance in the EU
The problem for the EU is that without a fully developed “government”

similar to that of national democracies, EU citizens are unable to ag-
gregate their concerns and demands in such a way as to express their
will directly at the EU level. There are naturally good reasons for why
this would neither be feasible nor particularly “democratic” in the EU
up until today. Such reasons have been discussed and debated at length,
including the lack of a European demos, a sense of common citizenship
and identity, or even a single public sphere.16 More recently, the schol-
arly conversation has shifted to seeing the potential for EU democracy
more positively, as being made up of overlapping public spheres17 and
consisting of demoi, which would therefore be capable of constituting an
EU demoicracy18 or creating a “European Republic.”19 But for the moment,
the EU is far from any supranational democratic reality. Importantly,
16 E
n particular, Weiler, 1995 and Grimm, 1997.
17 Risse 2010, 2015.
18 Nicolaïdis 2013.
19 Collignon 2004.
223
even were there to be any such supranational government, we would

still need to consider questions of national democracy, in particular
with regard to how the member states’ national democracies would
fare within any such supranational democracy.
Be this as it may, in the current context, we can nevertheless discuss
the democratic qualities of the EU. This is because the EU does have a
range of “governance” (rather than government) processes with mul-
ti-level representation and coordination that ensures that it stands up
to many of the tests of democratic legitimacy even in the absence of a
democracy similar to that found at the national level. Three such tests
or legitimizing mechanisms are theorized in the EU studies literature.
The first test or legitimizing mechanism consists of EU policies’ “out-
put” effectiveness and performance, judged on the basis of the results
of, say, the regulatory policies of the Single Market or the monetary pol-
icies of the Single Currency. The second is the EU’s “input” representa-
tion of and responsiveness to citizens’ political demands and concerns,
which is institutionally based on member states’ indirect representation
of their citizens in the Council and the EP’s direct representation of
EU citizens. These are often theorized as allowing trade-offs in which
more of the one makes up for less of the other. For example, when su-
pranational agencies produce good policies (that is, policies that citizens
believe are successful and appropriate), this is seen to make up for the
fact that the citizens have not voted for those policies.20
The third test encompasses what I call the “throughput” quality of
the EU’s governance processes, judged by their efficacy, accountability,
transparency, and inclusiveness. Here, there is no trade-off with input
or output legitimacy: Where the quality of the throughput processes is
good, they are not noticed by the average citizen, but where the quality
is bad, they can skew public perceptions of input responsiveness or taint
views of output results.21 Notably, during the Eurozone crisis, questions
have arisen on all sides about the quality of governance by the ECB, the
Commission, and/or the Council.
Opinion is split on the throughput legitimacy of EU governance pro-
cesses in the Eurozone crisis. Divisions persist, for example, on whether
the ECB acted too slowly or went too far in terms of its “unorthodox”
monetary policies; whether the Commission has been too flexible or not
20 Scharpf 1999; Majone 1998.

21 Schmidt 2013.
224
flexible enough in its application of the rules; and whether the Council has
been too active or not active enough in its creation of new instruments
to weather the crisis. Naturally, output legitimacy is also at issue, that is,
whether the ECB’s monetary policies, the Commission’s oversight, and the
Council’s legislation have produced good enough results in the Eurozone.
And here, the answer is likely to be negative, when judged by overall rates
of economic growth and levels of poverty, unemployment, and inequality.22
WITHIN THE EU, TREATY CHANGE IS VERY

DIFFICULT IF THERE IS NO CONSENSUS AMONG
THE TWENTY-EIGHT MEMBER STATES
Beyond these questions of EU level output and throughput legitimacy

are ones related to input legitimacy. They are situated in particular at
the intersection of EU democracy with its member states’ national de-
mocracies, especially in the midst of the Eurozone crisis. The increase
in the Council’s intergovernmental decision-making that centralized
power in the hands of member state executives, however necessary
at the height of the crisis, worked to the detriment of the more input
legitimate co-decision making with the European Parliament. It also
cut off the throughput legitimacy that comes with greater transparen-
cy in decision-making as well as with greater inclusiveness, by closing
off access to pluralist processes through the EP or the Commission for
citizens operating in cross-national as well as national interest groups
and social movements. Moreover, the increase in supranational govern-
ance through Commission oversight of national governments’ budgets
in the European Semester—which the Commission vets even before
national parliaments have had a chance to comment—has reduced a
key component contributing to national parliaments’ input legitimacy.
The most significant problem for national democracies subordinated
to the EU’s supranational governance system, however, is that the EU
does not have the main constitutive component of national democracies’
input legitimacy. National elections bring in new majorities that are
able to alter the rules, or even rescind them. This is not the case in the
EU, where treaty change is very difficult if there is no consensus among
the twenty-eight member states, given the unanimity rule as well as the
fact that some member states are required to hold national referenda.
22 But see Schmidt 2015b.
225
In national democratic polities, when economic prosperity plummets

and policies go awry, we generally assume that citizens will elect new
political leaders with mandates for policy change in the expectation
that both the politics and the economics will improve. Not so in the Eu-
ropean Union (EU), where citizen dissatisfaction with EU governance
of the Eurozone crisis can do and has done little to change the policies
forged at the EU level. Whether citizens express their concerns through
protest or votes, including voting out national governments and voting
in Eurosceptic parties on the political extremes, they have had little
impact on EU level decision-making. And because EU decision-making
is itself largely apolitical and technocratic, it also serves to undermine
national party government, which is political and normative.
The EU’s Challenges to National Politics and Democracy
The problem for national democracies is that the EU has actually un-
settled the balance between the two main functions of national level
political parties in their relations with their constituents. Increasingly
over time, European integration has forced parties to privilege responsi-
bility over representation, by enhancing their governing role to the det-
riment of their responsiveness to national electorates.23 Responsibility
without responsiveness alienates the citizens, while responsiveness to
the detriment of responsibility puts national governments at odds with
the EU rules and at risk of sanctions. The pressures to be responsible
affect not only the sitting governments that agreed to the policies but
also the opposition parties that may have campaigned against the very
policies that they will be expected to implement when they gain office,
even against “the will of the people.” The result is a step-change in mem-
ber states’ commitment to responsible government, to the detriment of
responsive government, leading to the “politics of constrained choice.”24
In consequence, even as national electorates clamor for more domestic
input into the decisions that affect their lives, governments are forced
to implement decisions that emanate from the EU, which may not be in
tune with domestic perceptions of the policies that they believe would
produce good and appropriate results.
23 Mair, 2013; Mair and Tomlinson, 2011.

24 Laffan, 2014.
226
EU Policy and Technocracy versus National Politics
To understand fully what this means, we need to consider the fragmented

nature of EU multi-level democracy taken as a whole, in which politics re-
mains primarily at the national level while policy has increasingly gone to
the EU level. Put another way, the national level has increasingly become
characterized by “politics without policy” as more and more policies are
removed from the national arena. This has thereby emptied national pol-
itics of substance, impoverishing the national political arena and leaving
the way open to populist contestation. At this same time, the EU level
consists of “policy without politics.” Member state leaders in the Council
tend to eschew the language of the left or the right when speaking of their
national interests, the EU Commission uses the language of technocracy,
and the EP, if not left out of the game entirely, uses the language of the
public interest.25 This makes for depoliticized EU policy debates that
use primarily technical arguments that do not resonate with European
citizens, who are used to the left/right divides of national debates, often
worry about EU policies on left/right grounds, and expect normative
arguments that resonate with national values and political concerns.
Such apolitical or technocratic language and discourse enable member
state leaders to cast their nationally focused discussions of EU policies
in whatever way they deem appropriate for their domestic political audi-
ences.26 The fact that member state leaders’ references to the EU often
take the form of blame-shifting (“the EU made me do it”) or credit-taking
(without mentioning the role of the EU) only increases problems with re-
gard to public perceptions of the EU. And it feeds into populist discourse
about the EU being responsible for all national problems, together with
the national politicians who go along with EU demands.
Yet, and here is the rub, although the EU-level discourse may ap-
pear apolitical and technocratic, as “policy without politics,” the actual
content of the policies is certainly political. The economic policies, in
particular in response to the Eurozone crisis, although cast as TINA—
there is no alternative—are in fact conservative, following ordoliberal
principles focused on the need for sound money and stable finance in
the macroeconomic sphere and neoliberal programs focused on struc-
tural reform of national labor and welfare systems. Moreover, while
25 Schmidt 2006: 21–29.

26 Schmidt, 2006; J-C Barbier, 2008.
227
the policies are in this sense political, neoliberalism itself, in its more
extreme forms, can be seen as anti-political or even anti-democratic—
with technocratic rule assumed better able to solve problems through
non-majoritarian institutions run by experts than political rule, pop-
ulated by “rent-seekers”.27 Notably, whether or not policymakers buy
into the anti-political philosophy of neoliberalism when taken to its ex-
tremes, they carry it out when they impose policies decided in Brussels
on national constituencies. EU technocratic considerations often seem
to take precedence over citizens’ normative concerns and to trump
their political concerns because they cannot change the policies through
national politics. This is when responsible politics replaces responsive
politics, and when the politics of constrained choice means that politi-
cians implement policies that national parties and parliaments do not
generate or debate and that the public may oppose.28
One important contributing element to the crisis of mainstream na-
tional party politics has come from this increasing predominance of
technocracy to the detriment of national party politics. As more and
more seemingly depoliticized EU level technocratic decisions have be-
come national policy, without real debate or significant involvement of
national parliaments, national party politics and indeed national democ-
racy has weakened. Definitions of democracy based on party politics
assume that political parties will provide both political mediation—by
aggregating and articulating competing conceptions of the common
good—and a procedural framework expressive of the constitutive values
of democracy, including the principles of parliamentary deliberation,
the rules of decision-making, and the recognition of the legitimacy of
opposition.29 EU level technocracy, by sidelining both national mediation
and deliberation, thereby weakens national party democracy.
An even greater concern is that ever-increasing technocracy plus ev-
er-weakening mainstream party politics have together fuelled the rise of
populism. Populists’ main target is mainstream party politics, which they
accuse of being run by self-serving and corrupt elites that have no interest
in “the people.” The irony is that technocracy also has as its target main-
stream party politics, seen as inefficient and rent seeking (read corrupt).
Technocracy and populism are very different things. But the danger of
27 G
amble 2013; Schmidt and Woll 2013.
28 L
affan, 2015.
29 Bickerton e Invernizzi Accetti, 2015.
228
technocracy is that too much of it undermines mainstream, party-based

representative politics while increasing support for the populists.30 And
too much populism can lead to the destabilization of democracy.
Europe’s Growing Political Volatility and Euroscepticism
The end result is the increasing political volatility that comes from citi-
zens’ sense that their preferences—whether expressed through the bal-
lot box, social concertation processes, or social activism—don’t count.31
Citizens have been punishing their national politicians with growing
frequency and intensity, resulting in the increasing turnover of sitting
governments32. Political volatility has become the rule not only in the
periphery but also in the core—in particular since the Eurozone crisis.
France is a case in point—President Sarkozy was only the second pres-
ident in the Fifth Republic not to have won a second term; President
Hollande has had the lowest popularity rating of any president of the
Fifth Republic (down to 12 percent in November 2014—although back
up to a still very low 20% by April 2015). Governments are generally
more fragile and often on a knife’s edge with regard to their majorities,
while mainstream parties have been having more and more difficulty
forming a government—as was the case of the Italian elections of Feb-
ruary 2013. Even more problematic for the EU is the possibility that
more anti-democratic or “illiberal” governments will also emerge, as in
Hungary. There are worrying signs even short of this, however, with the
rise of far right extremist parties, such as the neo-Nazi party, Golden
Dawn, in Greece, with 9% of the vote in the June 2012 elections, and still
above 7% in the September 2015 election.
Increasing Euroscepticism or even anti-European—and not just an-
ti-euro—feeling is part and parcel of the political volatility that only inten-
sified with the continuing Eurozone crisis. The “sleeping giant” of EU-re-
lated party divisions and Euroscepticism, long predicted by analysts, has
finally awakened.33 We can see this not just in the growing divisions over
the EU within mainstream parties but even more significantly in the
30 Bickerton and Invernizzi Accetti 2015.

31 Mair, 2013.
32 Bosco et al., 2012.
33 Franklin and Van der Eijk 2007.
229
rise of extremist parties. These include not only hard right extremes but
also the less extreme populists on the right (e.g., the National Front in
France, Geert Wilders’ party in the Netherlands), on the left (e.g., Syriza
in Greece, Podemos in Spain), and in what we could call the less easily
classified “radical center” (e.g., the Five Star Movement in Italy, the AfD
in Germany, and even UKIP in the UK). Notably, such parties can be
found not only in the countries hardest hit by the crisis, in Southern and
Eastern Europe, but also in those largely unaffected by the crisis econom-
ically, mainly in Northern Europe. This includes Scandinavia34—with the
True Finns’ breakthrough in the 2011 Finnish elections, the Sweden Dem-
ocrats’ in the September 2014 elections, and the Danish Peoples Party’s
historic gain in the June 2015 election, becoming the second largest party
in the country, and precipitating the collapse of the center-left govern-
ment. Even Germany, which had seemed vaccinated against the extreme
right, saw the meteoric rise of the AfD (Alternative for Germany) in 2014,
along with an anti-immigrant extremist movement, Pegida.
The results of the European Parliament elections were also a sign of
the rise of Euroscepticism, in particular with the victories of Marine
Le Pen’s FN in France and Nigel Farage’s UKIP in the UK—although
Prime Minister Renzi’s massive 40% victory for the social democrats of
the Democratic Party (PD) in the Italian contest (a first in the postwar
history of Italy) suggests that there is hope for centrist parties whose
leaders promise to make national views heard at the EU level as well
as to make national democracy work better.
Importantly, although public disenchantment with the EU in any form
is mainly seen in the rise of extremist and populist parties, especially on
the radical right,35 it can also be found in the polarization of views across
national European public spheres, in particular between Northern and
Southern Europe.36 Such polarization is also evident in the growing differ-
entiation in citizens’ attitudes between a more cosmopolitan open idea of
Europe and a more xenophobic closed view,37 as well as in public debates
that have become increasingly politicized around EU and Euro issues.
This has affected both Eurozone and non-Eurozone countries, largely
pitting the South against the North, with an increase in debates focused
34 aggart, and Szczerbiak 2013; Usherwood, and Startin 2013.

35 Gómez-Reino and Lamazares 2013.
36 Kriesi and Grande, 2015.
37 Kriesi et al., 2008.
230
on questions of national sovereignty, whether against “Northern” imposi-

tions of austerity by publics in the South, or against further supra-national
institutionalization and loan bail-outs by publics in the North—and this
despite the fact that the arguments of political elites engaged in crisis
management have focused primarily on economic and political efficiency.38
SURVEYS AND POLLS DOCUMENT

A PUBLIC DISENCHANTMENT WITH THE EU
AND NATIONAL GOVERNMENTS
Surveys and polls document quite clearly this public disenchantment

with the EU as well as with national governments.39 Eurobarometer
polls demonstrate the massive loss of trust in both national govern-
ments and the EU over time, in particular with the Eurozone crisis.
Trust in the EU dropped from a high of 57% in spring 2007 to a low
of 31% in spring 2012, which continued unchanged in 2013 and spring
2014, while trust in national governments dropped from a high of 43%
in spring 2007 to 24% in Fall 2011 and to an even lower 23% in fall 2013.40
Such negative views of the EU are evident also in the loss of support
for the European project, with the positive image of the EU down from
52% in 2007 to 30% in 2012, while negative images went up from 15%
in 2007 to 29% in 2012—neck and neck with the positive responses.41
Only in late 2014 was there an uptick in public views, with trust in the EU
jumping 6 points, to 37% in fall 2014, and trust in national governments up
6 points as well, to 29% in fall 2014.42 This may be the result of a sense that
the EU is finally turning the corner economically, that politics does matter,
with the greater politicization of the debates in the European Council among
political leaders around flexibility and in the EP with the elections, or that
the policies may change, given the ECB announcement of quantitative easing
and anticipation of the arrival of a new Commission promising investment
and growth. That said, it could just be a blip in the opinion polls.
Moreover, although support remains strong for retaining the Euro,
including 69% in Greece, 67% in Spain, 66% in Germany, 64% in Italy,
and 63% in France, this suggests only that citizens do not see exit from
38 Kriesi et al., 2012; Kriesi, 2014.

39 Hobolt 2015.
40 Eurobarometer EB 8241 Hobolt y Wratil, 2015.
41 Eurobarometer EB 78, Dec. 2012.
42 Eurobarometer EB 82, 2015.
231
the Euro as an option, not that they are happy with the policies related
to it.43 Much the contrary, a September 2013 Gallup Opinion Poll showed
that a majority of European citizens (51% of respondents) did not think
that austerity was working, by contrast with a minority of 34% who
thought it was working but takes time, and a very small percentage of 5%
who thought it was working.44 So how do we explain continued support?
There is evidence to suggest that even as citizens continue to support
the euro, their reasons have increasingly less to do with the euro’s link
to identity and increasingly more to do with their self-interest. A utili-
ty-based logic, rather than an identity-based one, is most likely to explain
why, despite the crisis, support has remained strong—even though the
public may be increasingly unhappy about the euro’s effects.45
Meanwhile, the unions find that all they can do is agree to concessions
while gaining nothing in return, as in the Spanish pension agreement and
the Irish Croke Park deal. At the same time, all that the most social move-
ments like the Spanish indignados have managed to do is to mobilize mem-
bers for protests and demonstrations that get them nothing other than,
sometimes, news coverage46—although in certain instances this has led
to the creation of new political parties, most notably Podemos and Syriza.
Repression of such movements is also an issue, however. The Council of
Europe (2013) criticized EU member state governments for sidestepping
regular channels of participation and social dialogue on the pretext of
national financial emergency, with harsh responses against demonstrators
and infringements of freedom of expression and peaceful assembly, as well
as reductions in media freedom, in particular in public outlets.
The Rise of the Populist Extremes in Europe
Complacency would be a mistake in the face of the rise of the populist

extremes. Extremist parties don’t simply go away when times get bet-
ter—as the experience of the boom years of the early and mid 2000s
demonstrate. Once populism takes hold, it is not easy to dislodge. The
extreme right populist parties that thrived in the 2000s on identity
politics focused on anti-immigrant issues and the EU have simply added
43 Pew Survey, May 2013.

44 Gallup poll, Sept. 2013 http://www.scribd.com/doc/172138343/Gallup-Debating-Eu-
rope-Poll-Austerity-Policies.
45 Hobolt and Wratil 2015.
46 Armingeon and Baccaro 2013.
232
skepticism about the Euro to its list of complaints. Moreover, with the
fall 2015 crisis resulting from the massive flows of refugees and immi-
grants from North Africa and the Middle East, the populist parties on
the extreme right, in particular, have continued to thrive on an issue
that they have long exploited to build support.
Populism should not be seen as a totally negative phenomenon, however,
since it can have certain positive effects, such as giving voice to underrep-
resented groups, mobilizing and representing excluded sections of society,
and increasing democratic accountability by raising issues ignored or
pushed aside by the mainstream parties.47 The extremes on the left in
particular, by mobilizing on the basis of social justice and human rights
as well as against the inequalities caused by the increasing predominance
of financial capitalism and its accompanying booms and busts, or by the
lack of progressive taxation, can serve as a positive pull on mainstream
parties, on the right as much as the left. However, there are many fewer
extreme left parties with a significant popular following (with the excep-
tion of Greece and Spain) than extreme right parties. And these are the
parties that appear to have exerted the most influence in political debates
so far, by pulling center right mainstream parties closer to their posi-
tions, especially with regard to opposition to immigration and freedom of
movement or minority rights. On the left, moreover, the rise of left-lean-
ing extremism has put center left parties in a quandary—to move left,
thereby challenging EU level agreements, or to resist any leftward move,
thereby weakening governing majorities or losing support from part of
their traditional electorate. In addition, the potential victory of one of the
populist anti-EU parties in national elections in the next few years could
be highly problematic not only for the country in question—especially if it
were a coalition with an extreme right party that would seek to implement
its discriminatory or anti-EU views—but also for the EU, given decision
rules that give individual member states veto power over treaties.
The only possible signs of light with regard to populist parties have
been Greece’s Syriza and Spain’s Podemos, which look set to become
those countries’ new center-left parties in place of the moribund Greek
Socialist party PASOK and the Spanish Socialist Workers’ Party (PSOE).
What has made these new parties credible to large portions of the elec-
torate is not only that they have engaged openly with difficult questions
about the distribution costs of fiscal consolidation. It is also the fact
47 Mudde and Kaltwasser 2012.
233
that their initial exclusion from power has put them in a good position
to deliver a radical critique of the rent-seeking behavior of mainstream
party, state and technocratic elites. Rather than worrying that these
new parties may prove intractable, we should recognize that they could
actually be the ones to bring real renewal to their countries’ politics as
well as to generate citizen-friendly structural reforms focused on reduc-
ing corruption, improving tax collection, and promoting social justice.
POPULISM CAN HAVE CERTAIN POSITIVE

EFFECTS: GIVING VOICE TO UNDERREPRESENTED
GROUPS, MOBILIZING EXCLUDED SECTIONS OF SOCIETY,
AND INCREASING DEMOCRATIC ACCOUNTABILITY
With the electoral victories of Syriza to national office and Podemos

to local office (most notably to the office of mayor of Madrid), these
parties’ ability to deliver on their promises will be put to the test. For
the moment, however, it is too early to say what effect they will have,
although the protracted negotiations of Syriza with the EU on a new
debt package suggest that the government tried, and failed, to change
both the Eurozone policy narrative and the agenda. This brings us back
to the relations of power within the EU and, in this case, the Council of
Eurozone Ministers, where Germany—with coalitional allies, in this case
Central and Eastern European countries, such as the Baltic states and
Slovakia, in addition to Finland and the Netherlands—again dominated.
The “Greek tragedy” that unfolded over the course of the spring and
summer of 2015 resulted from Syriza having misjudged the “game” of
hardball that was being played, in particular by German Finance Minister
Schäuble, who turned out to be the “master gambler.”48 That said, Greek
Prime Minister Tsipras also gambled, with a confusing referendum at
home in which he campaigned for a “no” vote in order to strengthen his
hand in Brussels, but got a “yes” vote (against austerity but in favor of
remaining in the euro), and came back to the table with a weakened hand
and a country in worse economic shape. The Greek government had not
expected the other member states, in particular in Southern Europe,
to stand with the other finance ministers for “responsibility” to follow
EU rules over responsiveness to Greek citizens’ expressed democratic
will. But this was arguably naïve, since the Greek government was not
48 Sauerbrey, 2015.
234
s imply asking EU member states to take on board another member state’s

democratic vote to end its adjustment program. It was asking Eurozone
finance ministers to suspend the EU rules on austerity and structural
reform, agreed by all, which those very ministers had been applying in
their own countries. It was not just the Irish and the Portuguese, who
had recently exited adjustment programs, who refused to let Greece off
the hook. It was even the Italians and the French, who had been clamor-
ing for increased flexibility in the application of the rules, but who were
equally engaged in pushing reforms in their own countries. To let Greece
off the hook would be to open up debate in other member states on past
and present reform programs under EU rules. Moreover, it could have
fueled electoral support for the populist extremes, which would use any
Greek exception to argue for an end to EU-related programs in their own
country—in particular for Spain, where Podemos had become a serious
threat to the Conservative government of Prime Minister Rajoy. Better to
envision Grexit—at least for German Finance Minister Schäuble, who in
response to Greek Prime Minister Tsipras’ claim that he had a democratic
mandate to demand change in Europe, stated: “I have also been elected.”49
The main question for Syriza will be whether it manages to become a
credible political party able to deliver policies while keeping its prom-
ises, thereby fraying the difficult path between being responsible by
credibly implementing the bailout agreement and being responsive to
the concerns of its citizens. In other words, will Syriza be able to bring
much needed reforms to the country in the domain of anti-corruption
efforts, strengthen state administrative capacity, collect taxes, and pull
Greece out its economic depression despite the continued austerity
demanded by the Eurozone leaders and consecrated by the bailout
package that they signed? The new elections in September 2015 that
brought back to power a Syriza now stripped of some of its most radical
elements has at least given Prime Minister Tsipras a mandate to imple-
ment the program—something he did not have when he was elected in
February 2015 with promises to end the austerity program.
With the exception of Greece, however, to see populism as potentially
returning party politics to its proper place in the EU is the optimistic
view. The pessimistic view is that the decline of traditional party poli-
tics, already evident beginning in the 1990s, continues apace, and with it
the growing political volatility related to the increasing mediatization of
49 Financial Times, June 15, 2015.
235
politics that enables populist parties to thrive.50 And at the EU level, the
pessimistic view is that gridlock takes hold, with no new consensus on
how to reform and with continued differences in preferences between
core and periphery. Moreover, if the extremes on the Eurosceptic right
come into coalition governments in one or more member states, all bets
are off in terms of forward movement in EU and Eurozone governance,
with deleterious effects all around.
Conclusion: What Future for Europe and National Democracies?
Over time, citizens have come to perceive the EU as more and more
remote (read technocratic) and national governments as less and less
responsive to their concerns, in particular in the midst of the Eurozone
crisis. This has translated not only into a growing loss of trust in the
EU and national governments but also to ever more volatile national
politics, with the growth of populism. Mainstream parties and party pol-
itics have been weakening, and incumbent governments have increas-
ingly been voted out of office as extremist parties with anti-euro and
anti-EU messages have gained attention, votes, and even seats in both
national parliaments and the EP. What is more, the loss of trust is also
increasingly found between countries, including especially Northern
versus Southern Europe with the Eurozone crisis, and then Central and
Eastern Europe with the North against the South in the latest Greek
crisis—although this mix has shifted with the current migrant crisis,
which has seemingly pitted the CEECs and the UK against the rest.
This said, the EU has not affected all national democracies in the same
ways. While some countries have largely maintained or even enhanced
their democratic powers and practices, others have seen their democratic
powers diminished, their democratic practices hollowed out—in particular
in countries subject to adjustment programs associated with bailouts. The
differences are most pronounced between Germany and Greece. Germany
has been able to ring-fence its national democracy while promoting its
preferences for the Eurozone rules, while its more active Constitutional
Court has also time and again vetted EU legislation when concerned to
safeguard German democratic standards. In contrast, Greek governments
have seemingly exchanged democratic autonomy for economic solvency,
as successive governments have become more responsible for policy while
giving up on responsiveness to citizens’ needs and demands, culminating
50 Kriesi 2014.
236
in the agreement of the extreme left party, Syriza, to do the same.

The question for the EU today is therefore how to reinvigorate nation-
al democracy across Europe while rebalancing the EU’s “democracy” in
ways that enable both EU and national levels to interact productively
within the new EU realities. For this, mainstream party politics at both
national and EU levels require strengthening and rebooting in order to
confront two very different enemies: technocracy and populism.
The EU myth has long been that it does best during moments of crisis,
when it engineers great leaps forward into deeper forms of integration
that solve the existential problems that beset it at the moment. This
time may be different (if the myth was ever true).51 In the Eurozone
crisis, rather than resolving the crisis with good (output legitimate)
results, the EU may have prolonged it through rules-based governance
processes and policies focused on austerity and structural reform.
This has also created serious problems for national input legitimacy,
by leaving national governments more torn than ever between their
responsibility to honor EU agreements and their responsiveness to cit-
izens, which only further feeds citizen disaffection. Such technocratic
fixes—which in the Eurozone crisis have meant doubling down on the
(throughput) rules—have only fueled the rise of populism, to the detri-
ment of mainstream national politics and democracy.
So what can be done? At the very least, the EU needs a reset in terms
of policies and processes—arguably with more responsibility for poli-
cies to be decentralized to the national level in order to ensure greater
responsiveness to citizens while at the same time ensuring continued
EU level coordination. But for this, as for the many other initiatives that
are required, the EU would first need leaders with a new vision and a
new narrative about what the EU is, what it should be doing, and where
it should be going. For the moment, such leaders are lacking.
RELATED ARTICLES:
From Nation-States to Member States:

European Integration as State Transformation
51 See Matthijs and Parsons 2015.
237
CI VI L S O CI E TY AND E U E NLA R GEMEN T
NIEVES PÉREZ-SOLÓRZANO Democracy promotion and support for civil

BORRAGÁN is a professor
society have been key defining elements of the
in European Politics at the
University of Bristol. She has enlargement policy since the Eastern Enlarge-
previously worked at the univer- ment. A working democracy is a political require-
sities of Exeter and East Anglia.
She holds a BA in History and ment to join the EU, and a vibrant civil society is
Geography from the University perceived as evidence of democracy and good
of Salamanca, an MA from the
College of Europe (Bruges) and a governance at work, because it allows citizens to
PhD from the University of Ex- freely associate and engage in civic action. This
eter. Her research examines the
involvement of civil society in chapter analyses the EU’s transformative role
EU governance. She specialises through the lens of the civil society promotion
in the ethical dimension of lob-
bying regulation and the regula- strategy in candidate countries launched by its
tion of conflict of interests in the enlargement policy, and to studies the wider
EU. She co-edits with Professor
Michelle Cini one of the leading debate about democracy in the EU and the
textbooks in EU Politics. standing of its enlargement policy after the crisis.
238
CIVIL SOCIETY AND

EU ENLARGEMENT
Introduction
The European Union’s enlargement policy has traditionally been de-

scribed as the EU’s most successful foreign policy because it has man-
aged to trigger the expansion of the democratic ideal across the Eu-
ropean continent. The EU’s ability to peacefully spread these ideals
derives from the political conditionality that defines the accession of
any country to the EU, which requires any candidate1 to converge to-
wards the EU’s principles of democracy, open market and protection
of human rights. The extent of the EU’s transformative effect became
obvious with the so-called Eastern enlargement in 2004-2007 when
twelve countries (out of which 10 were new democracies)2 joined the EU.
A VIBRANT CIVIL SOCIETY IS

PERCEIVED AS EVIDENCE OF DEMOCRACY
AND GOOD GOVERNANCE
Democracy promotion and support for civil society have been key
defining elements of the enlargement policy since the Eastern enlarge-
ment. A working democracy is a political requirement to join the Eu-
ropean Union and a vibrant civil society is perceived as evidence of
democracy and good governance at work, because it allows citizens to
freely associate and engage in civic action, whether to shape govern-
ment policy or to voice the concerns of certain sections of society. This
1 A candidate country is a country negotiating accession to the European Union. This

status is granted by the European Council on the basis of a recommendation by the
European Commission. Candidate country status does not give an automatic right to
join the EU.
2 These are Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Po-
land, Slovakia, Slovenia, Romania and Bulgaria.
239
concern for civil society promotion also responds to two challenges

affecting the European Union. Firstly, the involvement of civil society
actors in the governance of the Union has been presented not just as
a mechanism to ensure good governance, but also as an instrument
to engage citizens and thus address the Union’s perceived democratic
deficit and detachment from the lives of average Europeans. Secondly,
the EU’s territorial expansion has become contested amongst EU citi-
zens. A recent Eurobarometer survey shows that a higher percentage
of respondents within the EU is now against further enlargement (49%)
than those supporting enlargement (37%) (Eurobarometer, 2014:143).
Therefore, the EU has involved civil society to promote public debate
about the enlargement process and thus remedy increasing contesta-
tion both in the EU and in the candidate countries.
THE EU HAS INVOLVED CIVIL

SOCIETY TO PROMOTE PUBLIC DEBATE
ABOUT THE ENLARGEMENT PROCESS
This chapter analyses the European Union’s transformative role

through the lens of the civil society promotion strategy in candidate
countries launched by its enlargement policy, and places this analysis
in the wider debate about democracy in the EU, as well as the standing
of its enlargement policy in the aftermath of the financial crisis. This
is a salient topic for three reasons: firstly, because it allows us to in-
vestigate the EU’s ability to trigger change beyond its borders in order
to achieve a particular model of democracy, and to identify the mech-
anisms through which this change is promoted and supported. This
speaks to the wider academic debate about the EU’s normative power,
that is, the Union’s ability to project its core values through mechanisms
of reward (EU membership), support (financial assistance) or punish-
ment (delayed membership or suspension of membership negotiations).
Secondly, because it allows us to discuss aspects of the EU’s attempts
to address its democratic deficit through civil society promotion and
citizen participation, thus drawing on the wider debate about democ-
racy and legitimacy in Europe at a time when European integration
has become widely contested. Thirdly, the status of enlargement poli-
cy within the EU and its resonance across Europe has fundamentally
changed, due to three factors: the effects of the EU’s redefinition of
enlargement as a policy tool, the challenges derived from the absorption
240
of new members into the Union, and the effects of the 2008 financial
crisis. Enlargement is no longer a top policy priority for the EU, but
has become subsumed into the wider European Neighbourhood Policy.
This fact allows for a reflection on how the EU’s policy priorities shift
in light of more immediate challenges, such as the economic crisis in
the Euro zone, the refugee crisis or the strained EU-Russia relations.
This article starts by summarising the key characteristics of the EU’s
enlargement policy with a focus on conditionality as an instrument to
promote domestic change, and on the capacity-building mechanisms to
support such change, as evidence of the EU’s transformative-normative
power. The second part of the article discusses why civil society pro-
motion has become a concern for the European Union in general, and
in the context of enlargement in particular. The third section reviews
the European Union’s promotion of civil society in candidate countries
and its effects on civil society both at the national and European levels.
The final section summarises key findings, and places the analysis of
enlargement and civil society in the current context of contestation
and defiance towards the European integration, as well as of the key
challenges facing the Union.
The European Union’s Enlargement Policy
The European Union has been involved in several rounds of territorial

expansion3 that have seen the Union expand from the original six mem-
ber states to its current twenty-eight. The process of enlargement has
transformed the European Union by making it more diverse; it has had
far-reaching implications for the shape and definition of Europe, and for
the institutional set-up and the major policies of the Union. This section
summarises the key characteristics of EU enlargement as a process
and a policy by focusing specifically on the use of conditionality as an
he Northern enlargement in 1973 included Denmark, Ireland and the UK. The Mediter-
3 T
ranean enlargement had two phases: in 1981 Greece became a member while Portugal and
Spain joined in 1986. The EFTA enlargement in 1995 included three previous members of
the European Free Trade Agreement, namely Austria, Finland and Sweden. The Eastern
enlargement took place in two phases: Cyprus, Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU in 2004; and Bulgaria and Ro-
mania joined in 2007. The Balkan enlargement started in 2013 with the accession of Croatia
to the EU.
241
instrument to promote change in candidate countries. It also focuses

on capacity building as a mechanism to strengthen domestic structures
in the candidate countries, including civil society organisations. This
section of the chapter provides a necessary background to understand
what EU enlargement tells us about European integration in general,
but also to introduce the relevance of civil society as a concern for the
EU, which will be discussed in more detail in section two.
EU enlargement is best understood as both a process and a policy (see
Juncos and Pérez-Solórzano 2015). As a policy, enlargement refers to
the principles, goals, and instruments defined by the EU with the aim
of incorporating new member states; it is also part of the Union’s wider
European Neighbourhood Policy. In this typical intergovernmental poli-
cy under which member states retain the monopoly over decision-mak-
ing, the European Commission plays a delegated role monitoring the
suitability to join the EU of each country, and acting as a key point of
contact. A detailed set of chapters, each of which covers a policy area
of the acquis, frames the accession negotiations between the Commis-
sion in representation of the EU and each candidate country. Once all
aspects of accession have been negotiated, the accession treaty must be
approved by the European Parliament and needs to be ratified by each
member state, as well as by the candidate country in accordance with
their respective constitutional requirements. In most cases, candidate
countries have held a referendum prior to joining the EU.
As a process, EU enlargement involves the gradual and incremental
adaptation of the countries wishing to join the EU to its membership
criteria. In the academic literature, this process is traditionally called
Europeanisation: a one-way and asymmetric process through which
domestic actors adopt EU norms and values, and institutional and pol-
icy changes take place. The European Union acts as a normative actor
embarked in the diffusion of democratic norms within its immediate
neighbourhood (Sedelmeier and Schimmelfennig 2005). This is not a
static process; domestic actors are empowered or weakened by Euro-
pean integration, and domestic environments will present different de-
grees of resistance to EU-driven policy and institutional change while
new identities will develop. This process became more complicated after
the end of the Cold War, when the Union had to respond to the acces-
sion applications of the newly democratizing countries from Central and
Eastern Europe (CEE). With time, the EU’s membership requirements
have been expanded, and the number and diversity of countries wanting
242
to join the Union have increased. Originally, Article 237 of the Rome
Treaty only required the applicant country Treaty to be a “European
state”.4 The 1993 Copenhagen European Council adopted a set of more
specific political and economic conditions with which countries willing
to become EU members had to comply. According to the so-called “Co-
penhagen criteria”, applicant countries must have stable institutions
guaranteeing democracy, the rule of law, respect for human rights and
the protection of minorities, a functioning market economy capable of
coping with the competitive pressures and market forces within the
Union, and the ability to take on the obligations of membership, includ-
ing adherence to the aims of political, economic, and monetary union.
Applicants also had to adopt the acquis communautaire.5
EU ENLARGEMENT INVOLVES THE

GRADUAL AND INCREMENTAL ADAPTATION
UNDERTAKEN BY CANDIDATE COUNTRIES IN ORDER
TO MEET ITS MEMBERSHIP CRITERIA
The key principle driving EU enlargement has been that of political

conditionality, in other words, applicant states must meet certain con-
ditions (i.e., the Copenhagen criteria as outlined above) before they can
become EU member states. The identification of this set of criteria led
to the establishment of a complex monitoring mechanism managed by
what at the time was the Commission’s Enlargement Directorate-Gen-
eral (DG Enlargement),6 which would act as a “gatekeeper”, deciding
when countries have fulfilled these criteria and whether they are ready
to move to the next stage (Grabbe 2001:1020). This monitoring process
takes place following the benchmarks set by the Commission in differ-
ent documents—in the case of the Western Balkans, the stabilization
4 F
or example, Morocco applied for EU membership in 1987, but its application was turned
down because it was not considered to be a European country. By contrast, Turkey, which
had applied for membership in the same year as Morocco, was officially recognized as a
candidate country by the Helsinki European Council in December 1999, despite the fact that
Turkey’s European identity had been questioned by some member states.
5 This is a French term that refers literally to the Community patrimony. It is the cumulative body
of the objectives, substantive rules, policies, and, in particular, the primary and secondary legisla-
tion and case law—all of which form part of the legal order of the EU. It includes the content of the
treaties, legislation, judgements by the Court of Justice of the European Union, and international
agreements. All member states are bound to comply with the acquis communautaire.
6 Now renamed the DG Neighbourhood and Enlargement Negotiations (NEAR)
243
and association agreements (SAAs) and the European partnership

agreements (EPAs), and the Europe agreements in the case of the East-
ern enlargement. Compliance is also monitored in the annual Progress
reports produced by the Commission, which presents an assessment
of what each candidate and potential candidate has achieved over the
last year. This monitoring means that the enlargement process follows
a merit-based approach (Vachudova 2005:112–13). But is also reflects
the ability of the European Union to exercise pressure over the can-
didate countries to implement reforms to ensure compliance with the
EU’s norms in return for EU membership, market access, financial
and technical assistance and international recognition for their pro-
gress towards democracy. This is not a linear process, however, and
when candidate countries fail to meet their commitments, they face
either delayed accession (as in the case of Bulgaria or Romania due to
problems with corruption and judicial independence) or a halt in the
negotiations, as in the case of Turkey over the Cyprus issue. In words
of Schimmelfennig and Sedelmeier (2004:664), the effectiveness of EU
conditionality depends on the “credibility of the threats and rewards”.
Conditionality is being increasingly challenged as the credibility of the
main reward, which is EU membership, is becoming less definite for
candidate countries. As will be discussed in more detail below, the dif-
ficulties derived from the absorption of new member states after the
Eastern enlargement have provoked a limited enthusiasm for further
enlargement within the EU.
The “enlargement fatigue” is being mirrored in the candidate coun-
tries by an “accession fatigue”. In other words, without the tangible
promise of membership, political elites do not engage in the trans-
position and implementation of EU-driven reforms but rather “pro-
duce rhetoric statements of intent that are not followed through in
any substantive way” (O’Brennan 2013:42). Bridging the gap between
rhetoric and implementation is a key challenge. The EU has become
increasingly aware of the need to rigorously apply conditionality and
of the difficulties and weaknesses displayed by candidate countries in
meeting the accession criteria. Thus, these criteria have been exten-
sively defined by the EU to include conditions “partially designed to
address transformation problems and weaknesses of the candidates”
(Dimitrova 2002:175). In practice, this has translated into the develop-
ment over time of an “administrative acquis”, that is, a set of institu-
tions and administrative structures needed to successfully implement
244
TV debate on TF1 channel during the French referendum

on European Constitution, on 29 May 2005.
the legal acquis before accession.7 To address this gap between actual
candidate countries’ ability and requirements of EU membership, the
EU has actively engaged in capacity building initiatives to support both
public administrations and civil society actors. Capacity building has
been widely used as a policy instrument by international organisations
since the 1990s in order to enable domestic systemic change, to reduce
poverty and to promote sustainable development (Black 2003). As a
policy tool, it has some specific characteristics, such as being highly
technical, lacking direct pressure mechanisms and assuming that those
being targeted do not have sufficient resources, skills and information
(Papadimitriou and Stensaker: 3). While intended to create long-term
7 The 1995 Madrid European Council stressed that it is not enough that the candidate mem-
ber states transpose European legislation into national laws, they need also to ensure the
administrative and judicial infrastructure to implement the acquis communautaire. The ad-
ministrative capacity condition for accession means that a candidate country must bring
its institutions, management capacity and administrative and judicial systems to Union
standards with a view to implementing the acquis effectively in good time before accession.
The administrative acquis (also termed “institutional and administrative acquis” since 1997)
(European Commission (1997) has been characterized by a lack of clarity regarding its spe-
cific implications and measurement criteria. It is also marked by the need to develop new
horizontal instruments to reinforce the institutional capacities of the candidate countries,
given the absence of specific legal or institutional templates that would allow for tighter
top-down enforcement.
245
effects, capacity building does not necessarily provoke an automatic

change in regulation, standards or policy content. The policy discourse
surrounding capacity building is strongly aspirational in terms of its
language of inclusiveness and cooperation and democracy, but the ac-
tual practice is more results-oriented and heavily influenced by the
donor’s or the international organisation’s priorities. (Black 2003:117).
As will be discussed below, some of these characteristics and discrep-
ancies feature in the EU’s capacity building initiatives for enlargement
and civil society promotion.
THE EU IS ABLE TO DIFFUSE ITS

NORMS OF DEMOCRACY WITHOUT THE USE OF
COERCIVE MILITARY POWER; IT HAS BUT TO
WIELD THE CARROT OF EU MEMBERSHIP
In the context of enlargement, the EU’s main capacity building initi-

atives take the form of financial assistance through the Instrument for
Pre-accession Assistance (IPA) and the Technical Assistance and Infor-
mation Exchange instrument of the European Commission (TAIEX). Typ-
ically, these instruments incorporate mechanisms to educate, socialise
and transfer expertise in order to help countries in the application and
enforcement of EU legislation, as well as enabling the distribution of EU
best practices. For example, TAIEX incorporates the use of workshops,
expert visits and twinning initiatives. In the case of IPA, its current pro-
gramme running until 2020 incorporates performance indicators aimed
to assess whether the expected results have been achieved (European
Commission 2015a). In this manner, the EU has been able to exercise a
substantial influence over the socio-economic and political systems of the
countries of CEE, as the attractiveness of membership has allowed the
Union “to pursue broader political goals through its enlargement policy”
(Sedelmeier 2011). This offers an excellent illustration of the EU’s role as
a normative soft power: it is able to diffuse its norms of democracy, open
market and defence of human rights by submitting them to membership,
but also making explicit requirements about what kind of institutions
or actors may be best placed to implement such norms (Manners 2002).
Unlike traditional powers, the EU is able to do so without the use of co-
ercive military power; it has but to wield the carrot of EU membership.
The queue of countries wishing to join the Union reveals that member-
ship continues to be a very attractive option for countries surrounding
246
the EU.8 However, a number of problems are challenging the ability of

the EU to exercise influence in its neighbouring countries, and call into
question the relevance of enlargement as a policy. Firstly, the Eurozone
crisis, especially the situation in Greece, as well as the absence of a
substantive believe in the likelihood of EU membership, is affecting the
perception amongst the candidate countries of the EU as an anchor of
economic prosperity and as a driver of reform. This accession fatigue is
accompanied by a remarkably diminished support to EU membership
in the candidate countries. For example, while Macedonian citizens are
still pro-EU membership (56% approved of EU membership), support
for membership has continued to decline in Turkey, where only 38% con-
sidered accession to the EU a “good thing” (Eurobarometer, 2013:67-8).
Secondly, the refugee crisis highlights the Union’s limits to act purpose-
fully and in unison in the face of the plight of refugees seeking asylum
in the member states and, critically, it highlights the divisions between
old and new member states. Thirdly, the so-called enlargement fatigue
has been felt since 2004. It refers to a general post-accession reticence
within the EU towards further widening, in benefit of a greater focus
on deepening integration across member states. This is reflected in the
steadily decline in support for EU enlargement amongst EU citizens,
with a slight majority against further enlargement (49%) versus those
supporting enlargement (37%) (Eurobarometer, 2014:143). It is also re-
flected in the increasing support to populist Eurosceptic parties in the
majority of EU member states (as illustrated by the results of the 2014
European elections), who see enlargement as a source of insecurity, fur-
ther pressure on migration and of crippled welfare systems across the
EU. Fourthly, this gives context to the new Commission’s approach to en-
largement under President Jean-Claude Juncker. In his opening speech
to the European Parliament in July 2014, President Juncker stated that
“the EU needs to take a break from enlargement” and that “no further
enlargement will take place over the next five years” (Juncker 2014:11).
For the countries wishing to join the EU, these developments call into
8 A
ccession negotiations were opened with Turkey in 2005, Montenegro in 2012, and
Serbia in 2013. FYR Macedonia and Albania are also candidate countries, although
no date has been set for the start of accession negotiations. Bosnia and Herzegovina
and Kosovo have the status of “potential candidate countries”. Furthermore, Ukraine,
Moldova, and Georgia have repeatedly expressed their desire to become members of
the EU one day
247
question the EU’s long-standing commitment to enlargement. Fifthly,

Russia’s annexation of Crimea and the civil war in Ukraine have strained
EU-Russia relations, as evidenced by the EU’s imposition of economic
sanctions on Russia, and the latter’s retaliation by limiting food imports
from the EU member states. In the medium term, and despite Angela
Merkel’s warning that Moscow cannot veto EU expansion. The EU’s
approach to enlargement in the Balkans and to its Eastern neighbours
will be shaped by an increasingly belligerent Russian Federation that
regards Serbia, Moldova and Georgia as part of its sphere of influence.
Finally, and critical to the role of conditionality as a defining principle,
we are witnessing democratic backsliding in some new member states
such as Hungary. While conditionality worked as a principle to shape the
meritocratic accession of countries from Central and Eastern Europe,
once in the EU not all of them have maintained such standards; condi-
tionality has thus ceased to have any real teeth to redress the situation.
The case of Hungary’s new constitutional challenge to key fundamental
rights and the way in which the Fidesz government is dealing with the
refugee crisis are two illustrative examples of how EU membership does
not necessarily lock in democracy in former communist countries. The
EU has been unable to tackle this democratic backsliding and, crucially,
has refrained from applying Article 7 TEU that allows the Council to
withdraw certain membership rights for serious and persistent breach-
es of democratic principles (Sedelmeier 2014:106). In words of Juncos
and Whitman (2015:213): “Ten years after the ‘big bang’ enlargement
to Central and Eastern Europe, there are significant lessons learned
as to the challenges faced by EU conditionality to promote deeper po-
litical and economic domestic reforms.” Given that the EU considers
civil society a building block of democracy, it is not surprising that the
Union has turned its attention to promoting its development and policy
engagement, both in EU governance mechanisms and in the context of
enlargement. The next section unpacks why civil society promotion is
a general concern for the EU, and specifically a dimension of the EU’s
enlargement strategy.
Civil Society Promotion as Concern for the European Union
Civil society is a contested concept that has a long tradition in the his-
tory of political thought. In this chapter, civil society is understood as a
248
ediating sphere of society, distinct and independent from the market

m
and the state, which is populated by more or less organised groups that
claim to represent, speak for and participate in policy-making on behalf
of diverse constituencies. Civil society is typically regarded as a crucial
building block of democracy, because it is the space between the pub-
lic and private spheres where civic action takes place (Grugel 2002:93,
Kaldor 2003, Putnam 1993). This enthusiasm for civil society (particularly
since the 1990s) amongst governments and international organisations
can be explained by three interrelated phenomena, namely, the perceived
CIVIL SOCIETY IS THE SPACE BETWEEN

THE PUBLIC AND PRIVATE SPHERES WHERE
CIVIC ACTION TAKES PLACE
failure of traditional forms of political representation, such as political

parties; the demise of communism; and the need to democratise inter-
national organisations, such as the European Union. In practice, the out-
come of this enthusiasm was reflected in the expansion of programmes
for civil society promotion in developing countries since the 1980s, used as
an instrument to strengthen transition to democracy after the fall of the
Berlin Wall. In this context, strengthening civil society was viewed as an
end in itself, as well as a means of furthering the other elements (such as
human rights and free and fair elections) within the democracy promotion
agenda (Ishkanian 2007:3). The European Union echoes this enthusiasm
for civil society in its enlargement policy by affirming that “when it comes
to democratic governance and the rule of law and fundamental rights, in-
cluding freedom of expression and association and minority rights, [civil
society] can create demand for enhanced transparency, accountability
and effectiveness from public institutions and facilitate a greater focus
on the needs of citizens in policy-making” (European Commission 2013:1)
In the academic debate, the revival of civil society after the revolu-
tions in Central and Eastern Europe gave voice to more critical views
that challenged the benign understanding of the term (Kopecky and
Mudde 2003) and highlighted the dangers of an active civil society, not
necessarily supporting ideas and goals of democracy, freedom and the
rule of law (Berman 1997). Empirical studies showed evidence of how
the civic space opened up by democratisation processes had been filled
not only by liberal and benign civil society actors, but also by actors,
who are ideologically radical, populist, intolerant and often involved in
249
The President and the Prime Minister of Croatia at their

arrival to sign the EU Accession Treaty, on 9 October 2011.
contentious state politics (Glenn 2001:31). Bringing the “dark side of

civil society” to the fore, Kostovicova (2006:21, 25-26) uses the example
of post-Milosevic Serbia as evidence of how civil society is weakened
by the processes of democratisation and nation building. Similarly, the
analysis of this situation where an international donor intervenes in
domestic promotion of civil society has given rise to critical voices.
These opinions draw attention on how external actors, such as the EU,
promote a specific type of civil society group, which is constrained,
dependent on, and co-opted by the priorities of international donors
(Gershman and Allen 2006; Fagan, A. 2005). Mindful of this, the Eu-
ropean Union has been more forthcoming recently about the fact that
outside influence is not sufficient to strengthen civil society, while warn-
ing that “external donors may over influence civil society activities. Or-
ganisations that are excessively dependent on international or domestic
public funding can in some instances hardly be considered genuine civil
society and risk de-legitimising their activities in the eyes of the public”
(European Commission 2013:3).
For the European Union, civil society promotion is a priority, firstly
as a policy mechanism to address its perceived democratic deficit, and
secondly as an instrument for democracy promotion in its enlargement
strategy. These two concerns are tightly interlinked and reflect two of
the wider phenomena identified above, namely, the need to democratise
250
international organisations due to their detachment from individual

citizens, and the legacy of communism in the form of weak civil socie-
ties across Central and Eastern Europe. As will be argued below, the
European Union’s internal discourse on it as a remedy to its own dem-
ocratic shortcomings has influenced how the Union has conceptualised
civil society and designed mechanisms for its promotion in candidate
countries. Equally, civil society has influenced the policy instruments
designed by the EU to challenge the increasing contestation of enlarge-
ment and legitimise the accession of new member states amongst the
citizens of the EU, and those of the candidate countries.
Civil Society and the EU’s Democratic Deficit
The EU’s democratic deficit typically refers to the conceptualisation of

the Union as an elitist, international organisation where decisions are
reached by unelected policy experts who are not accountable to elect-
ed representatives, while laws are passed with little transparency and
publicity. The public questioning of the EU’s democratic credentials
was already evident in the 1990s with the difficult ratification of the
Maastricht Treaty in France and Denmark.9 Over the years, Europe-
an citizens have expressed their discontent with the European Union
through their negative votes in several Europe-wide referenda, but also
by increasingly supporting Eurosceptic parties, both in domestic and
European elections. Initially, the EU tried to address this challenge by
enhancing the powers of the European Parliament and thus strength-
ening the representative dimension of democracy in the Union. Such an
approach proved insufficient, given that the European Parliament lacks
the power of legislative initiative, does not have the same influence as
legislatures in the member states, and participation in European elec-
tions is markedly lower than in national elections. The 2001 White Paper
on European Governance, which was designed “to open up policy-making
to make it more inclusive and accountable” (European Commission
2001: 5), develops a further two-pronged legitimatisation strategy that
expands beyond the representative democracy realm, by focusing on
enhanced citizen participation via civil society organisations, and a
9 F
rench citizens ratified the Treaty with a minimal majority of 51% and the Danes were
made to vote in two subsequent referenda to finally ratify the Treaty.
251
more active communication with the general public on European is-

sues. Each dimension is discussed in turn below, as more civil society
participation and better communication with citizens are strategies
that have been transferred to the EU’s enlargement policy.
The White Paper consolidates the role of civil society organisations
as “giving voice to the concerns of citizens and delivering services
that meet people’s needs” (Commission of the European Communities
2001:11); and it regards participation as “a chance to get citizens more
actively involved in achieving the Union’s objectives and to offer them
a structured channel for feedback, criticism and protest” (Commission
of the European Communities 2001:12). Participation as a democrat-
ic principle which defined governance in the EU was incorporated in
the Lisbon Treaty.10 This fact constitutionalises the Union’s attempt to
strengthen its legitimacy by incorporating civil society participation
and direct citizen engagement with its day-to-day functioning. The sec-
ond aspect of the EU’s legitimating strategy consists in a better com-
munication and dialogue with citizens. It speaks to another dimension
of democracy, deliberation and its promise to deliver better informed
citizens who ideally are more supportive of the integration process.
The European Commission developed a number of initiatives which
follwed in the footsteps of the White Paper and which were a reaction
to the non-ratification of the Constitutional Treaty, and to the public
contestation towards the European integration evidenced in the refer-
enda for the ratification of the Lisbon Treaty. These initiatives aimed at
“listening better”, “explaining better” and “going local” in the context
of the Plan D for Democracy, Dialogue and Debate and the White Paper on
Communication Strategy and Democracy. The Plan D intended to rein-
vigorate European democracy and help the emergence of a European
public sphere, where citizens are given the information and the tools
10 A
rticle 11 TEU establishes that: 1. The institutions shall, by appropriate means,
give citizens and representative associations the opportunity to make known and
publicly exchange their views in all areas of Union action; 2. The institutions shall
maintain an open, transparent and regular dialogue with representative associ-
ations and civil society; 3. The European Commission shall carry out broad con-
sultations with parties concerned in order to ensure that the Union’s actions are
coherent and transparent; 4. Not less than one million citizens who are nationals
of a significant number of Member States may take the initiative of inviting the
European Commission, within the framework of its powers, to submit any appro-
priate proposal on matters where citizens consider that a legal act of the Union is
required for the purpose of implementing the Treaties.
252
to actively participate in the decision making process and gain owner-

ship of the European project (European Commission 2005a). In other
words, a wider and more inclusive public debate would help build a
new consensus on the future direction of the Union. These initiatives
THE WHITE PAPER WAS DESIGNED “TO

OPEN UP POLICY-MAKING TO MAKE IT MORE
INCLUSIVE AND ACCOUNTABLE”
are continued today through the Citizen’s Dialogues, which give people
across Europe a chance to talk directly with members of the European
Commission and of the Europe for Citizens Programme, which includes
amongst its priorities debating the future of Europe to deepen further
into the discussion on the future of Europe and what kind of Europe do
citizens want (European Commission 2015b).
Drawing on the lessons learnt from its domestic approach to civil
society, the EU actively tries to address the weakness of civil society in
the candidate countries, while at the same time improving the direct di-
alogue with citizens in order to enhance public support for enlargement.
The Challenge of a Weak Civil Society in the Candidate Countries
The promotion and support for civil society organisations (CSOs) has
been at the core of the EU’s enlargement strategy since the 1990s. Such
an approach was not evident or really necessary in earlier rounds of en-
largement, because civil society was not yet a concern for the European
Union as a legitimising mechanism, the accession of new member states
was not contested, and the countries joining the EU before 2004 were
not regarded as requiring support in this respect. However, with the fall
of the Berlin Wall and the move towards regime change in the countries
previously under the Soviet sphere of influence, political scientists and
international organisations found themselves having to account for how
the so-called democratisation process had taken place, and also seeking
to identify evidence of democratic practice in these new democracies. The
early literature on democratisation in post-communist Europe defined civ-
il society as a vibrant force energised by the popular support for the 1989
revolutions (see Cohen and Arato 1992). The relative success in the democ-
ratisation process of countries such as Poland, Hungary or the former
253
Czechoslovakia, where civil society had stronger roots, provided validating

empirical evidence. The comparative reading of accounts on the success-
ful civil society experience in post-authoritarian regimes such as those in
Mediterranean Europe and Latin America, and the typical post-Cold War
language of a common wave of democratisation provided ample evidence
to foreshadow similar dynamics in post-communist Europe.11
WITH THE FALL OF THE BERLIN WALL

THE DEMOCRATISATION PROCESS UNDERTAKEN
HAD TO BE ACCOUNTED FOR HOW
These optimistic accounts were soon followed by more cautious evalua-

tions of civil society dynamism in the new democracies. In fact, the actual
evidence pointed towards a relatively weak civil society (compared not
just with that of established democracies, but also and most importantly
with that of post-authoritarian regimes) and an inadequate associational
life (Howard 2003, Bernhard 1996, Ost 1993). The defining features of this
weak civil society are low levels of organisational membership, low levels
of participation in associational life, low levels of trust in organised civil
society organisations and limited de facto consultative procedures. The
factors explaining the apparent paradox of weak civil societies in the re-
gion are to be found in the communist legacy and the mismatch between
a disenchanting citizens’ experience of post-communist democracies
and their high expectations (Howard 2003, Pérez-Solórzano Borragán
2006:135). A different interpretation of this absence of a vibrant civil
society points towards the impact of globalisation, which prevents the
societal sphere in post-communist Europe from developing in a vacuum,
to a certain extent. Thus the new democracies of Central and Eastern
Europe are converging towards, or being infected by, the pathology of
citizen demobilisation that affects established democracies.
Faced with such weak civil society, the EU’s focus on strengthening
its structures in candidate countries does not come as a surprise. Addi-
tionally, to ensure that civil society from the new member states actively
participates in the consultation mechanisms that have emerged at the
European level, the European Union has been active in supporting the
Europeanisation of civil society organisations in the candidate countries.
The EU’s key initiatives and instruments are discussed in the next section.
11 For a critique of this view see Collier and Levitsky 1997.
254
Enlargement and Public Contestation
As discussed earlier, the European Union faces the challenge of the

increasing public contestation towards further territorial expansion of
the Union. While citizens’ support for EU enlargement might not have
been an issue previously, the Eastern and Balkan rounds forced the
European Union to seek mechanisms to address increasing public re-
luctance and declining support for further enlargement in the member
states. The accession of new member states has become a politicised
issue both in the EU and in the candidate countries. Within the EU the
accession of new member states has given rise to expectations, as well
as to fears regarding mass migration and concerns about the accession
of countries such as Turkey, which is regarded as being less European
and geopolitically more problematic than other candidate countries. In
the new member states, the costs of adapting to EU membership, cou-
pled with general public misunderstanding of the process of accession
to the EU did not match the initial public expectation of a prosperous
return to Europe. Enlargement fatigue and disillusionment with the
European Union explain the EU’s attempt “to dispel misapprehensions
about the enlargement process” (European Commission 2000). The
next section discusses the EU’s civil society promotion strategy and the
attempts to address the challenges of a weak civil society in candidate
countries and of contestation.
EU Enlargement and Civil Society Promotion. An Assessment
The EU supports civil society in candidate countries during the pre-ac-

cession period. In supporting the development of a vibrant civil society,
the Union conceives of these organisations as actors who will help can-
didate countries to meet political conditionality demands such as human
dignity, freedom, equality, the rule of law and respect for human rights.
At the same time, the involvement of civil society in the pre-accession
process is regarded as a means “to deepen citizens’” understanding of
the reforms a country needs to complete in order to qualify for EU mem-
bership. This can help ensure EU accession is not just a government
exercise and stimulate a balanced public debate, which is crucial to
achieving a well-informed decision on EU membership at the end of the
pre-accession process” (European Commission 2013:1). In this context,
255
the EU’s civil society promotion strategy has two main goals: achieving
an environment that is conducive to civil society activities and building
the capacity of CSOs to be effective and accountable, independent ac-
tors. In addition to this domestic agenda, the European Union is also
committed to ensure that civil society organisations in the candidate
countries are able to aggregate key societal interests and channel them
to decision-makers at the EU level, in order to facilitate the involvement
of civil society actors in the EU consultative mechanisms,12 such as the
European Economic and Social Committee, the European Commission’s
consultations or the European Social Dialogue:
Social partners play an important role in promoting the right to associa-

tion and should therefore also be supported to improve their action. The
perspective of social partners and professional and business associations
also needs to be reflected in the Commission’s work, and partnerships
between these organisations, particularly from disadvantaged regions,
and their counterparts in the EU should be strengthened (European Com-
mission 2013:3).
The increasing contestation of enlargement policy is being addressed

by the European Union through dialogue mechanisms that mirror the
instruments deployed, in order to address its democratic deficit (see
earlier discussion). To improve citizens’ knowledge about EU enlarge-
ment, the European Commission has developed a so-called civil society
dialogue13 “to generate a dialogue with Europe’s citizens and to ensure
broad support for the enlargement process both within the EU member
states and the candidate countries” (DG Enlargement 2002:18). With
this strategy the European Commission expected to generate dialogue
12 T
his commitment to enhancing the participative capacity of civil society at the Euro-
pean level is present in the European Union’s rhetoric since 2008 (see Commission of
the European Communities 2008).
13 The civil society dialogue is further developed in the 2005 Communication “Civil Socie-
ty Dialogue between the EU and Candidate Countries”. In this document, the dialogue
with civil society is framed as an overarching communication instrument with a very
wide remit in terms of objectives, areas of concern, actors involved and territory as
the initiative is extended to Croatia. The 2006 Communication “The Western Balkans
on the Road to the EU: Consolidating Stability and Raising Prosperity” expands the
civil society dialogue to include all the countries of the Western Balkans, with an addi-
tional focus on enhancing dialogue between Western Balkan societies. The European
Commission’s 2008 “New Civil Society Dialogue Programme” re-labels the civil society
dialogue as the “People 2 People – P2P Programme”.
256
with public opinion in the candidate countries and in what then was the
EU-15 to “help ensure that the negotiations are concluded with public
support and the resulting Treaties of Accession are signed and ratified
on the basis of well-informed and realistic public expectations” (Euro-
pean Commission 2000b:1). Civil society dialogue is concerned with the
top-down engineering of a public sphere that is debating enlargement,
where the exchange of information and opinions would result not just
TO IMPROVE CITIZENS’ KNOWLEDGE

ABOUT EU ENLARGEMENT, THE EUROPEAN
COMMISSION HAS DEVELOPED A SO-CALLED
CIVIL SOCIETY DIALOGUE
in better-informed citizens, but ones supportive of the enlargement

process. Also, the civil society dialogue would “support the further de-
velopment of a lively and vibrant civil society in the candidate coun-
tries, which is key to the consolidation of human rights and democracy,
in line with the political criteria for accession”(European Commission
2005b:3). Thus civil society appears to be conceived of as a party in
the dialogue, a facilitator of citizen engagement and an outcome of the
process. As Commissioner Rhen (2008) put it at the time: “Communi-
cating the success story of enlargement is a common challenge for us
all. As civil society representatives, you are the bridge between the EU
institutions, national authorities and citizens. You can raise awareness
of the successes and challenges of EU enlargement. You can strengthen
confidence between citizens in the EU and the aspirant members”.
The European Union has two sets of instruments, namely, political and
financial, to implement its civil society strategy. Regarding political sup-
port, the European Union commits to encourage enlargement countries
to make legislation more conducive for civil society and to promote the
involvement of civil society in the pre-accession process. There is crucial
rhetoric support derived from the regular reviews of the state of civil
society in each candidate country’s annual Progression report. Regard-
ing financial support, while funding is available through the Instrument
for Pre-accession Assistance (IPA) the main instrument is the Civil So-
ciety Facility (CSF14), created in 2008 by the European Commission to
14 For the period 2011-12 the CSF had a budget of EUR 40 million.
257
provide financial support for the development of civil society. The CSF
incorporates three strategies that reflect both domestic and transnation-
al initiatives, namely: support for national and local civic initiatives and
capacity-building to strengthen the role of civil society in the candidate
countries; support for partnerships between civil society organisations
in the candidate countries and from EU Member States to develop net-
works and promote transfer of knowledge and experience; and a “People
2 People” programme supporting visits to EU institutions and exchange
of experience, know-how and good practice between local civil society,
the EU and civil society in Member States (European Commission 2015c).
Over the years, the European Union has become more prescriptive
in terms of the monitoring and evaluation of its initiatives in the can-
didate countries. This strategy, more oriented to results, responds to
the EU’s focus on addressing the candidate countries’ implementation
deficits and ensuring funding invested in truly addressing the Union’s
priorities regarding civil society development. For this purpose the
European Commission, in consultation with stakeholders, has devel-
oped a monitoring and evaluation framework that involves a clear set
of objectives, results and indicators (European Commission 2013:6-11).
For example, when assessing whether the objective of achieving a more
conducive environment for the activities of civil society organisations
the following results will be expected:
All individuals and legal entities can express themselves freely, assemble
peacefully and establish, join and participate in non-formal and/or regis-
tered organisations
The policies and legal environment stimulate and facilitate volunteering
and employment in CSOs;
National and/or local authorities have enabling policies and rules for grass-
roots organisations.
(European Commission 2013:6-7)
However, the European Union has not developed a systematic review
of its civil society promotion strategies in the context of enlargement.
The official evidence of whether the goals outlined above have been met
is fragmented and can be drawn mainly from the European Commis-
sion’s Progress reports on each candidate country,15 and from its own
Strategy papers on enlargement. This evidence reveals that in the most
15 These reports are publicly available online at http://ec.europa.eu/enlargement/coun-

tries/strategy-and-progress-report/index_en.htm
258
A group of visitors observes a plenary

session of the European Parliament.
recent Commission’s Strategy Paper on enlargement of 2014, the need

to do more to support civil society is recognised (European Commission
2014:2). In this same document, the limits to civil society development
in Serbia and Bosnia Herzegovina are acknowledged, while in the case
of Turkey there is specific mention to how “several pieces of legislation
proposed by the ruling majority, including on fundamental issues for the
Turkish democracy, were adopted without proper parliamentary debate
or adequate consultation of stakeholders and civil society” (European
Commission 2014:46). The political science literature has been more
forthcoming by providing country-study and sectoral analysis of the
state of civil society in candidate countries during the pre- and post-ac-
cession periods. A review of this literature shows that the achievements
derived from these initiatives remain modest and that there is evidence
of variation across countries, as the EU’s influence has had a differ-
entiated impact on diverse national environments. Moreover, there is
evidence that in certain circumstances the EU’s intervention may have
perpetuated the weakness of civil society through financial depend-
encies and the demanding criteria established by EU institutions in
order to engage civil society organisations in regular consultation. The
selected examples below offer an illustration of the EU’s impact on civil
society development in the candidate countries, the EU’s impact on the
ability of civil society groups from candidate countries to participate
259
in consultations at the European Union level, and the “People 2 People”

initiative in addressing public contestation.
The EU’s Domestic Influence
Firstly, looking at the creation of better domestic environment for civil

society development, the evidence points towards a slow and gradual
change. For example, the European Economic and Social Committee
has been active in trying to help civil society organisations operate effi-
ciently at the national level, providing know-how and supporting their
participation in European activities (see Pérez-Solórzano Borragán and
Smismans 2008). Such initiatives include the organisation of training
seminars, fact-finding missions to the candidate countries, hearings with
civil society and discussions with European Commission delegations.
The EESC also sought to build adequate administrative capacity to pro-
mote and enhance stakeholder participation in policy making in the new
member states. It equally encouraged the creation of national economic
THE EU HAS BECOME A REFERENCE TO

IMPROVE CONSULTATION STRUCTURES, BUT CIVIL
SOCIETY ORGANISATIONS ARE STILL CONSTRAINED
BY THEIR DOMESTIC ENVIRONMENTS
and social committees. Whether the EESC initiatives had any impact at
the national level remains difficult to assess. A 2002 study undertaken
on behalf of the Committee shows that the national economic and social
committees promoted by the Committee often operate informally, rather
than as strongly institutionalised advisory bodies for their government,
and questions remain as to their representativeness (Drauss 2002:169).
On the other hand, the EU has become a discursive reference to seek
legitimacy and improved consultation structures, as well as to justify or-
ganizational change, but civil society organisations are still constrained
by their domestic environments, the dominance of national level iden-
tities and a lack of sufficient resources to engage in transnational ac-
tivities. For example, in the case of the Czech Republic, Forest’s study
(Forest 2006) is a clear illustration of how the EU’s support has con-
tributed to a re-conceptualisation of gender concerns by women’s or-
ganisations. The transfer of new concepts, such as equal opportunities
260
and gender mainstreaming, coupled with capacity building, training and

monitoring, has shaped women’s organisation mobilisation repertoires.
The EU’s influence prompted the creation of new mediating institutions
such as the Council for Equal Opportunities, a new domestic opportu-
nity structure that formalises the relationship between the state and
civil society organisations and thus establishing formal relationships
between non-governmental organisations (NGOs) and the state. Both
sets of actors are empowered by this development: by engaging in the
Council, women’s organisations gain in recognition and can expect long-
term influence on policy-making. The state has enhanced its delibera-
tive stand while limiting public protest and moving gender issues out
of the political debate (Forest 2006).
Continuing with the example of the Eastern enlargement, despite the
EU’s expectation of stakeholder involvement in national consultations,
the pre-accession strategy did not empower sectoral organisations. A
2003 survey of business interests16 shows communication between na-
tional governments and the business sector on enlargement-related
issues was limited during the accession process. Only 4.9% of the com-
panies surveyed were regularly consulted; 68.5% only received general
information about the accession process through the media and felt that
they did not influence their government’s negotiating position at all. This
limited consultation on EU accession caused concern amongst business
umbrella organisations based in Brussels who called on “the political
leaders and the Commission to introduce new awareness programmes
and to consult much more with the business community in the accession
countries on economic issues” (Eurochambres 2003).
A comparative study of environmental actors in Hungary, Poland
and Romania shows that civil society organisations were too weak and
often unwilling to exploit the opportunities offered by EU accession.
Moreover, civil society organisations were reluctant to collaborate
with state actors and saw themselves more as watchdogs scrutinis-
ing the government’s implementation of environmental regulations. In
addition, the availability and distribution of resources favoured those
civil society organisations that were already better established and re-
sourced (Börzel and Buzogány 2010:158-182). In her comparative survey
16 T
he CAPE surveys were undertaken by EUROCHAMBRES between 2001 and 2003
and involved 1658 companies from Bulgaria, the Czech Republic, Estonia, Hungary,
Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia
261
of environmental NGOs in the Czech Republic, Hungary, Poland and

Slovakia, Carmin found more evidence of how the pre-accession experi-
ence helped the development of two clusters of NGOs: “The first cluster
consists of a small cadre of highly professionalized and international-
ized organizations that engage in policymaking in the international and
national arenas. The second cluster of NGOs tends to sponsor activities
and take action on behalf of their members and provide environmental
and government support services at the local level […] NGOs in the
latter group often are overlooked by agencies, governments and founda-
tions, even though they make important contributions to environmental
governance (Carmin 2010:183). In the case of environmental NGOs in
Bosnia-Herzegovina and Serbia, Fagan identifies an increasing profes-
sionalization of NGOs as result of EU intervention. In practice this
translates into limited policy-making access to “less contentious policy
areas where they are encouraged to deliver expertise and assistance
rather than to act as advocates for community interests or to express
political opposition to contentious developments” (Fagan 2010:203).
In sum, the evidence to date regarding domestic influence points to-
wards a Europeanisation of the discourses of some civil society organ-
isations; the differentiated impact of the EU has empowered and weak-
ened certain actors, while new dependencies have been established due
to the structural weakness of both civil society and state mechanisms
for consultation.
The EU’s Influence on the European Dimension
Regarding the European dimension of civil society development, recent

research shows that the participation of civil society organisations in the
EU’s consultation procedures post-accession is less dynamic and evident
than that of similar organisations in older member states. While the do-
mestic weakness of civil society in candidate countries may offer some
evidence explaining the difficulty to mobilise at the EU level, the con-
sultation conditions are also an additional hurdle to negotiate in terms
of resources, capacity, expertise and internal good governance (Quit-
katt 2011, Pérez-Solórzano Borragán and Smismans 2012, Kohler-Koch
and Quittkat 2013). Recent data shows that, compared to other member
states, engagement in Commission consultations is scarce and has no
clear pattern regarding the choice of policy area. Specifically, between
262
2003 and 2006, the input of civil society groups from new member states
to Commission impact assessment consultations accounted for 6.14% of
the total opinions submitted. In other words, the total of opinions sub-
mitted by the eight new democracies (not including Romania and Bul-
garia) is less than half the total opinions submitted by German or French
groups, and it amounts to almost the same amount of opinions submitted
by Finnish or Belgian groups (see Obradovic and Alonso Vizcaino 2007).
RESEARCH UNDERTAKEN ON THE EUROPEAN

ECONOMIC AND SOCIAL COMMITTEE SHOWS THAT
REPRESENTATIVES OF CIVIL SOCIETY FROM THE
NEWER MEMBER STATES ARE LESS ACTIVE
Similarly, research undertaken on the European Economic and Social

Committee—the European Union’s institution for the representation of
civil society in the aftermath of the Eastern enlargement—shows that
representatives of civil society from the newer member states are less
active (see Pérez-Solórzano Borragán and Smismans 2008). The question
is if, to some extent, the under-representation is due to a lack of interest
or a felt need on behalf of these new representatives to first go through
a longer learning process before taking up such functions, or, rather, if
current procedures and established practices tend to disadvantage new
members. There seems to be a willingness from some representatives from
the newer member states to be more actively involved, although some
have complained that current procedural practice tends to privilege “ex-
perienced” old member state representatives to their exclusion. A number
of representatives from new member states have complained about the
absence of interpreters during meetings, for example: “Excuses justifying
the lack of interpretation because of the large number of new members
and languages cannot be put forward in perpetuity. Since highly specialised
vocabulary and terminology is used during the discussion of opinions, it is
not simply a question of knowledge of languages but an important problem
that requires rapid and effective resolution” (Mendza-Drozd et al. 2004).
The EU’s Influence on Addressing Contestation
The fact that enlargement is still a contested policy goes some way
to show the limited effect of the European Union’s People 2 People
programme (formerly known as civil society dialogue) in addressing
263
contestation. In the absence of a systematic review of the outcomes

derived from this programme, what follows is a critique towards it,
based on its objectives. What I argue, instead, is the deficient instru-
ments to achieve them. The People 2 People programme aims not only
to generate public spheres across different levels, but also to address
THE POLICY TOOLS ADDRESS ALL

CIVIL SOCIETY ACTORS: INSTITUTIONS,
ORGANISATIONS AND THE MEDIA
the deficiencies of domestic civil societies. Policy tools should not only
be heterogeneous, but also aimed at different outcomes. Hence, the
measures can be divided into four categories:17
1. S
upport for local, civil-society initiatives and capacity building, in
order to reinforce the role of civil society.
2. P rogrammes to bring journalists, young politicians, trade union
leaders and teachers into contact with EU institutions and thus
raise awareness about the EU and its enlargement process.
3. S upport for building partnerships and developing networks be-
tween the civil society organisations, businesses, trade unions and
other social partners and professional organisations in the benefi-
ciary countries, and their counterparts in the EU, so as to promote
transfers of knowledge and experience.
4. I nvolving the media in awareness raising to improve citizens in-
formation.
A detailed evaluation of these measures allows some initial conclu-
sions about the potential that the civil society dialogue met the general
aspiration of creating a transnational, European, deliberative and pub-
lic sphere that is supportive of enlargement. In general terms, the pol-
icy tools address all the relevant actors operating in the public sphere,
namely institutions, civil society organisations and the media. Looking
in more detail at the actual initiatives to generate a transnational de-
bate (particularly in the case of Turkey), it is interesting to see that the
Commission is relying on mechanisms to increase awareness about
17 W
hat follows draws on the Communication from the Commission to the Council and
the European Parliament, Recommendation of the European Commission on Turkey’s
progress towards accession; the 2005 Communication “Civil Society Dialogue between
the EU and Candidate Countries”; and the 2006 Communication “The Western Bal-
kans on the Road to the EU: Consolidating Stability and Raising Prosperity”.
264
urkey in the EU member states, but none of these address the creation
T
of deliberative forums for discussion. Rather, the initiatives refer to mo-
bility programmes, scholarships, media development, financial support
to NGO development, exchanges between professional organisations,
and school links and public relations activities sponsored by the Turk-
ish government (European Commission 2005b:5-8). These mechanisms
could potentially address the perceived information gap and thus help
to develop better informed citizens, both in Turkey and in the EU, who
become more supportive of enlargement. It is not obvious that these
mechanisms would either change perceptions—as there is no control
on how messages may be understood by citizens—or help bring citizens
in Turkey and in the EU to a deeper understanding of each other and
the enlargement process, which would unite them in the support of this
common project, thus legitimating it.
The networking activities involving civil society organisations from
the candidate countries and their counterparts in the member states
are geared towards providing socialisation mechanisms. In this way,
knowledge transfer can take place and the civil society organisations
for the candidate countries can learn how to operate in a pluralistic
environment, and learn from the best practice of their EU counterparts.
In other words, these initiatives would allow for the socialisation of the
professional elites and strengthen the capacity building of civil society
organisations in the candidate countries through the sharing of best
practice. The policy tools deployed by the Commission point towards
deliberation amongst elites. This reproduces the systemic fragmentation
that has traditionally limited emergence of a truly pan-European public
sphere. Here some kind of aggregating mechanism would be required.
The expectation would be that civil society organisations are able to
act as a discursive interface among the EU, the citizens of the member
states and the candidate countries by monitoring policy-making, and to
bring citizens’ concerns into EU deliberations. To this day, the People
2 People programme does not provide any kind of feedback or reflexive
mechanisms that would facilitate the fulfilment of civil society organ-
isations’ potential to help dynamise a public sphere on enlargement.
Furthermore, a question still to be addressed is whether civil society
organisations in the candidate countries actually posses the capabilities
and expertise to aggregate the interest of their constituencies and sub-
sequently channel their concerns to the European level. The answer to
this question is “no”. The number of capacity-building mechanisms that
265
the civil society dialogue deploys suggests that civil society organisations
in the candidate countries are far from ready to perform the dual con-
veyor belt function (i.e. aggregating the wider interest and channelling
it to the decision-makers). The civil society dialogue’s aspirations are
not matched by the capacity and expertise of civil society organisations
in the candidate countries. There is a clear mismatch between policy
aspirations and policy tools that needs to be remedied.
Conclusion
Enlargement policy and civil society promotion are tightly interlinked.

While further territorial enlargement has taken a back seat in the cur-
rent European Union’s priority list, the support for democracy in gen-
eral, and civil society in particular are still significant priorities for the
Union, particularly in light of the observed democratic backsliding in
new member states such as Hungary or Romania, and of the increas-
ing contestation of European integration as the increasing support for
Eurosceptic parties shows.
This chapter has shown how the EU’s concept of civil society is deeply
rooted in a maximalist understanding of democracy where civic groups,
associations, NGOs or trade unions play a fundamental role in ensuring
good governance. Moreover, in the specific context of the enlargement
policy, they help to address the deficiencies in the implementation of the
accession criteria. The European Union acts as a typical international
donor who promotes a particular type of civil society and who expects
its civil society promotion strategies to trigger domestic change. As this
contribution has revealed, the marriage between EU enlargement and
civil society promotion is not always a smooth one and the EU has had
a limited transformative role. At the domestic level, there is limited evi-
dence to show that the EU’s civil society promotion strategy has helped
remedy the weaknesses of civil society in new member states, in the
Balkan candidate countries and in Turkey. More needs to be done to ad-
dress funding dependencies and support more grass roots, issue-based
groups whose role may not be to implement EU programmes, but to
aggregate the interests of diverse sections of society. The EU has been
partially successful in providing domestic civil societies with legitimat-
ing discourses to try and enhance their participation (when sought) in
policy-making when faced with reluctant and often inadequate state
266
structures. At the European level, while the EU provides opportunity

structures for participation in policy making, the evidence points to-
wards a less participatory dynamism amongst civil society actors from
the new member states, who struggle to meet the EU’s participatory
requirements of expertise and organisational good governance against
a background of structural weakness. This state of affairs challenges
the EU’s own ability to lock in democracy in the new member states as
THE EU ACTS AS A TYPICAL DONOR

WHO PROMOTES A PARTICULAR TYPE OF
CIVIL SOCIETY AND EXPECTS ITS STRATEGIES
TO TRIGGER DOMESTIC CHANGE
conditionality no longer applies and the threat of membership suspen-

sion on the grounds of not meeting the EU’s maximalist understanding
of democracy is not yet credible. But it also defies the EU’s own attempt
to address its democratic deficit by enhancing civil society participation
in EU governance, as that civil society active at the EU level does not
necessarily mirror the Union’s own diversity.
Finally, contestation of EU enlargement is increasing and the Euro-
pean Union is having to address more immediate challenges, such as
the aftermath of the Euro zone crisis, the lack of robust united action
to address the refugee crisis, and the difficult relations with Russia.
However, these difficulties ought not to divert the EU’s attention from
its civil society promotion strategy in candidate countries in particular,
and its Eastern Neighbourhood in general. The European Union needs
in these countries dynamic, independent civil society organisations that
are able to exercise checks and balances on national governments, es-
pecially if they deviate from the principles of democracy, rule of law and
protection of individual rights.
RELATED ARTICLES:
From Nation-States to Member States:

European Integration as State Transformation

267
TH E WELFARE STATE I N EU R OPE
KEES VAN KERSBERGEN This chapter discusses the strengths and

Kees van Kersbergen holds weaknesses of European welfare states,
a PhD in Social and Political
Sciences (European University which protect citizens in hard economic
Institute, Florence, Italy, cum times. In many countries, governments tend
laude). He is professor of Com-
parative Politics at Aarhus Uni- to respond with austerity policies that not
versity. He has published widely only undermine the protective function of the
in the area of welfare state stud-
ies in refereed journals and with welfare state, but also weaken its economic,
major university presses. His social and political support base. Increasing
latest book is Comparative Wel-
fare State Politics: Development, inequality is one of the observable conse-
Opportunities, and Reform (2014, quences, which is associated with bad social
with Barbara Vis).
and political outcomes in terms of health,
social mobility, social and political trust, polit-
ical representation and participation.
268
THE WELFARE
STATE IN EUROPE
Introduction
Allow me to start this chapter by saying that there is no such thing

as the European welfare state. Nevertheless, the welfare state is seen
as something thoroughly European in origin, in character and even in
terms of identity.
The welfare state is European in origin because its birth is commonly
dated to late 19th century Germany. Around 1850, most industrializing
capitalist countries already had some version of a modern poor law and
had started to introduce labour protection measures (Polanyi [1944]
1957). The Prussian state, moreover, had already started to experiment
with social insurance or health funds (see Hennock 2007) in the 1840s.
But it was in imperial Germany that Bismarck first introduced man-
datory social insurances on a grand scale (Kuhnle and Sander 2010),
including sickness insurance in 1883, an industrial accident scheme
in 1884 and old age and invalidity insurance in 1889. Other European
countries followed, some early on (Austria) while others comparatively
late (the Netherlands).
THERE IS NO SUCH THING AS

THE EUROPEAN WELFARE STATE.
NEVERTHELESS, IT IS EUROPEAN IN ORIGIN,
CHARACTER AND IDENTITY.
The welfare state is European in character, because the wide-ranging,

interconnected social policies that make up the welfare state reflect the
historical European experience of social misery, turmoil, protest, polit-
ical conflict and war, on the one hand, and reconciliation, cooperation,
stability, order, harmony and peace, on the other. The welfare state came
to embody a unique answer to the question of how to build and main-
tain a relatively cohesive economic, social, political and cultural order.
269
Bismarckian social insurances, after all, were not merely pioneered to

deal with the social risks of industrial society and to improve workers’
living conditions, but they were principally launched to serve the polit-
ical goals of state- and nation-building and social order. The very term
“welfare state” was popularized, if not invented, by the Archbishop of
York, William Temple, who used it in 1941 to contrast this ideal state
with the Nazi “warfare state”.
In terms of identity, the welfare state has established itself as an idea
and an ideal that Europeans share, a political and social accomplish-
ment highly valued by European publics and an institution to which
people attach their (national) identity. This is perhaps more true for the
Scandinavian realm than for other areas, and it also holds more weight
for some of the welfare state’s programmes than for others. Yet, even
in the United Kingdom, where the public entrenchment of the welfare
state is arguably much weaker than in Scandinavia, the National Health
Service (NHS) is considered to be one of the best in the world and, more
importantly, an institution that makes people proud to be British. Tell-
ingly, the NHS beat the Armed Forces, the Royal Family and the BBC
in a popularity contest (Ipsos MORI 2014; Quigley 2014).
In the broader European Union context, the catchphrase “European
Social Model” has come to refer to something that is uniquely Europe-
an to the extent that this model is capable of promoting positive-sum
solutions to what elsewhere (e.g., in the allegedly not-so-social American
model) are considered to be unavoidable trade-offs between sustainable
economic growth, on the one hand, and social justice and social cohe-
sion, on the other. Because of its effectiveness, the European Commis-
sion champions the developed welfare state as an example to mimic for
other countries and at the supranational European level. In the words
of former President of the European Commission Barroso:
Yes, we need to reform our economies and modernise our social protection
systems. But an effective social protection system that helps those in need
is not an obstacle to prosperity. It is indeed an indispensable element of
it. Indeed, it is precisely those European countries with the most effective
social protection systems and with the most developed social partnerships,
that are among the most successful and competitive economies in the
world (Barroso 2012).
The welfare state in Europe represents a huge accomplishment; thriv-
ing economies, livable and trustful societies and efficient polities are
almost unthinkable without it. Yet, at the same time, the welfare state
270
is under siege as it faces a number of demographic, economic, financial

and political challenges.
I will proceed in this chapter by first shortly portraying three views
that often pop up in debates on the welfare state and that are meant to
challenge its very raison d”être. They contain important truths, but only
tell part of the story. Next, I discuss what the welfare state does and
argue that it is primarily about providing protection against social risks
and much less about redistributing income. I then describe how wel-
fare states in Europe differ enormously in how well they protect their
populations and in how they address income inequality. Welfare states
are not static, and in the last two decades or so, many have reoriented
their social protection systems towards labour market activation and
social investments so as to deal with the challenges of new social risks
and ageing. This has been a pan-European and—in an economic and
social sense—a relatively advantageous development, but one which
the financial crisis and the economic recession that followed it are now
seriously jeopardizing. The formidable task welfare states are facing
is to find yet again new ways to continue to provide social protection
while promoting sustainable economic growth (see Begg et al. 2015).
Three half-truths about the welfare state
Three beliefs often pop up when people talk about the welfare state.
One view frequently heard is that it is a very expensive, inefficient
human invention that we, at best, can just about afford, but that most
likely is depleting our resources and is, in any case, unmaintainable in
the long run. The welfare state is making us all worse off because of
the prohibitively high level of contributions and taxes it requires. In
other words, although the welfare state might perhaps be valued as in
some way useful from some social point of view, overall it is primarily
an economic burden. Indeed, the welfare state obviously requires large
financial resources to function and has built-in economic disincentives,
but this is only one side of it. The other part is that the welfare state—
on the demand-side via consumption smoothing—greatly contributes
to macroeconomic stability and—on the supply-side through invest-
ments in human capital (e.g., education and training) and social ser-
vices—stimulates economic development. Recent research even finds
that welfare state generosity does not create work disincentives; on
271
the contrary, it increases employment commitment (Van der Wel and

Halvorsen 2015).
The second belief recurrently voiced is that the welfare state is in crisis
or is itself causing a crisis in the economy or in politics. The intriguing
observation to make here is that the welfare state has almost always
been considered to be in crisis or to be causing one. In 1975, the trilateral
commission (Crozier et al. 1975) published a report on the worldwide
overload and ungovernability crisis of democracy. This was allegedly
caused, among other things, by the continuously rising expectations
and demands of citizens on the welfare state. The oil crises of the 1970s
were argued to have led to a fiscal and legitimacy crisis of the welfare
state. Some predicted that the welfare state caused economic collapse
because its redistributive policies undermined the profitability of capital
and hence impeded investment. Others highlighted that the expansion-
ary spending of the welfare state was crowding out private investment.
SOME PEOPLE CONSIDER

THE WELFARE STATE A KIND OF ROBIN HOOD
INSTITUTION THAT STEALS FROM THE RICH
AND GIVES TO THE POOR
More recently, predictions of crisis and collapse are coming from anal-
yses that highlight the negative impact on the welfare state of increasing
interdependence, internationalization and globalization. Social systems
are believed to be in need of dismantling for reasons of international
competitiveness. Governments are caught in a “race to the bottom”.
On top of this, intensified European integration is argued to favour
“social tourism” and “social dumping”, phenomena that are undermin-
ing national welfare states, and European solutions still lag behind.
In spite of these alarming stories, however, the welfare state not only
clearly survived several crises (Starke et al. 2013), but has continued
to function. In fact, it has performed its functions of social protection
surprisingly well given the extreme challenges it has been facing (see
Van Kersbergen and Vis 2014: chapters 5 and 10).
The final idea that frequently crops up is that the welfare state is
fundamentally a kind of “Robin Hood” institution that steals from the
rich and gives to the poor. This perspective obviously arouses strong
sentiments as some worship Robin Hood and his Merry Men as heroes
of the poor, while others see him and his helpers as villains who should
272
be detained and rendered harmless. The Robin Hood metaphor, in a

sense, is invoked to underpin the two other views: the welfare state as
a millstone around the neck of the economy and the welfare state in
crisis and as the cause of crises. Although such ideas obviously capture
parts of the reality of welfare states in Europe, they merely tell part of
the story and, hence, show an incomplete truth.
Robin Hood versus the Piggy Bank
So, what is the whole story about the welfare state? What is the welfare
state and what does it do? Let me focus on the Robin Hood issue. Is the
welfare state really a kind of Robin Hood institution that steals from the
rich and gives to the poor? The first thing to note here is that although
income redistribution is an aspect of many social policy programmes
that make up the welfare state, especially those tailored to fight poverty,
it is not the reason why the welfare state exists. The welfare state is a
collection of institutionalized policies and entitlements as social rights,
which in various ways offer protection for all who might experience
economic and social hardship. The welfare state is, therefore, foremost
about the pooling and redistribution of social risks, particularly the risk
of income loss, and not (necessarily) about income redistribution. The
metaphor best depicting this essential function of the welfare state, as
Barr (2001) has so imaginatively suggested, is the piggy bank: a device
to help people insure against social risks and to assist people in redis-
tributing resources over the life cycle. Importantly, welfare states differ
enormously in how well their piggy banks protect citizens against social
(labour market and life cycle) risks and how much their Robin Hoods
redistribute income.
The second thing to stress in this context is that there is no such thing
as the welfare state. Welfare states differ quite dramatically in the size
of the budgets devoted to social protection and redistribution, with
net social spending (2011, after taxes, tax breaks and social benefits
are taken into account) ranging from a low 14.2% of Gross Domestic
Product (GDP) in Estonia to a high 31.3% of GDP in France (OECD 2013).
Moreover, welfare states not only contrast sharply in cash, they also di-
verge distinctly in kind: they are qualitatively very different in how they
organize and finance their systems of social protection and how they
design and how they spend their social budgets. These differences, most
273
importantly, have huge consequences for the functioning of the labour

market, for the organization of people’s working and family life and for
the level of social protection and income equality societies foster and
people enjoy.
In many welfare states, Robin Hood plays a less prominent role than
the piggy bank for the straightforward reason that the systems are
simply not designed to redistribute income (even though they all do to
some extent). In fact, in the conservative and southern welfare states
(see below) income redistribution was a secondary goal and occurs as a
side-effect if it enters social policy at all. Only in the social democratic
universalist welfare states does Robin Hood redistribute large sums of
money, not only to the poor, but also, most strikingly, to the middle class.
What welfare states do is to offer protection against social risks (old
age, unemployment, disability, etc.) and provide income maintenance.
Most income redistribution is actually horizontal, that is, intrapersonal
over the life course and within income groups, and much less from the
rich to the poor. Only in the lean liberal welfare states is Robin Hood
supposed to play the superhero of the poor because here many of the
social provisions exclusively cater to the poor. However, recent research
(Levell et al. 2015) shows that even in the liberal welfare states (e.g.,
the United Kingdom), more than half of income redistribution is of the
intrapersonal kind and over the life-course: people put money in the
piggy bank during their active working life and smash it when they are
in need later in life.
Different kinds of welfare states in Europe
The kind and quality of social rights that the welfare state guarantees
entail one dimension that has to be taken into account to understand
the extent to which individuals and families can uphold a decent life in
case of sickness, unemployment or old age, independent of their per-
formance on the labour market. How strict are the eligibility rules for a
benefit? How long should one have contributed to a scheme before one
is entitled to a transfer or service? Does a social benefit depend on one’s
former income and does qualification depend on a means test? This
quality of benefits and services is high if it is relatively easy to qualify
for them, for example, when the required contribution period is short
and when there are no means tests. Similarly, a social right is of high
274
quality when a benefit’s replacement rate is high (how much of a wage

or salary is replaced by a benefit) and its duration is long.
The other dimension that one needs to look at to evaluate the quality
of social protection is to what extent the welfare state alters, reproduces
or even reinforces social and economic stratification. As Esping-Ander-
sen (1990, 55) has famously argued, welfare states “are key institutions
in the structuring of class and the social order”, and depending on their
institutional set-up, they have widely divergent effects on social struc-
ture. Welfare states “may be equally large or comprehensive, but with
entirely different effects on social structure”, and they come in different
shapes: “One may cultivate hierarchy and status, another dualisms,
and a third universalism. Each case will produce its own unique fabric
of social solidarity” (58). Esping-Andersen distinguished three types of
welfare states: liberal, social democratic and conservative.
ESPING-ANDERSEN
DISTINGUISHED THREE TYPES OF WELFARE
STATES: LIBERAL, SOCIAL DEMOCRATIC
AND CONSERVATIVE
The liberal welfare state is market-oriented, and public provisions for

income maintenance and relief mainly cater to the poor. Most people
in countries such as Australia, the United States and the United King-
dom (with the notable exception of health care) are able to find social
protection in the private market. Low and flat rate tax-financed benefits
characterize the system, and access to benefits is restrictive because
benefits are means-tested. Private social insurance is encouraged via
tax exemptions and allowances, which favour the middle class and the
rich. The liberal welfare state is also service-lean, and transfers are
modest to mean. The inequalities generated in the private market are
not countered in this system, and those who can afford it are well-pro-
tected, whereas others come to depend on means tested assistance.
This model came under political pressure early on (Reagan, Thatcher),
and austerity politics became the dominant response to many of the
challenges the welfare state faces.
The social democratic welfare state grounds social rights in citizen-
ship or residence and, hence, to a substantial extent, does away with
status differentials. This model, as found in the Nordic countries, is
generally also tax-financed, but access to social provisions is much
275
more open, and benefits and services are more generous than in the
liberal model. The model provides social services for all without strict
qualifying conditions. The role of the market in service and benefit
provision is played down. Several of the Nordic countries went through
performance crises in the 1990s, but managed to recover from this by
essentially maintaining their path of development, stressing maximum
labour force participation, flexible but protected labour markets and
social investment.
WELFARE STATE MODELS DIFFER

SUBSTANTIALLY IN HOW MUCH THEY ARE
COMMITTED TO SPEND
The conservative or corporatist welfare state model features Bis-

marckian social insurance programmes that are differentiated and
segmented along occupational and status distinctions. In addition, in
countries such as Germany and Austria, state employees (civil serv-
ants) receive privileged treatment in social insurance, particularly pen-
sions. In this model, people, particularly men, qualify for a provision
or benefit to the extent that they have contributed to a social scheme.
Employment record is decisive for acquiring social rights. Employees
pay contributions to social insurance funds and receive benefits that
are earnings-related and depend on contribution period. This model is
typically social service-lean and transfer-heavy.
These features of the conservative system imply that the existing
stratification system and income inequality are largely left untouched
and, in fact, tend to magnify rather than moderate existing differences
in status and income. The employed, especially those working for the
state, are well-protected insiders, whereas those without a strong at-
tachment to the labour market are outsiders whose social protection
depends on their family. The model came under strain in the 1980s and
1990s because many of its qualities (early exit schemes, passivity of
benefits, dualism in protection, gender bias) precluded the necessary
growth of labour market participation, especially of women.
Some argue that there is a specifically southern or Mediterranean
fourth model found in Italy, Spain, Portugal and Greece. The model
shares many features of the conservative one, but is characterized by
much more fragmented and particularistic social insurances, a rather
one-sided stress on pensions (although less so in Spain), a very pronounced
276
insider-outsider and gendered structure of the labour market, an even

more pronounced role of the (extended) family in the state-market-fami-
ly mix of social protection, an under-developed social assistance system
and clientelism in the allocation of benefits and jobs in the public sector.
This model came under pressure because of problems of low (formal)
labour force participation, wide social protection gaps, a weak state
and, hence, suboptimal tax capacity (the quintessential example would
be Greece, see Petmesidou and Guillén 2015).
These welfare state models, in short, differ substantially in how much
they are committed to spend, but what matters most for social out-
comes, such as social protection and inequality, is on what specific so-
cial purposes that money is spent, how the programmes are organized,
taxed and financed and how transfer- or service-oriented they are.
The generosity of welfare states
One way of gauging the relative quality of what the welfare state does
and how well it does this is by looking at the welfare state’s generosity.
Generosity depends on the replacement rates of key social benefits, the
duration of such benefits, the kinds of demands people have to meet in
order to qualify for a benefit, the number of waiting days included in
the rules and how many people are covered by the social scheme. Gen-
erosity captures the extent to which social services and benefits have
been institutionalized as social rights that allow people to “maintain a
livelihood without reliance on the market” (Esping-Andersen 1990, 22).
In chart 1, countries are ranked (high to low) according to their gen-
erosity index in 1980. The higher the score on this index, the more
generous the systems are. As can be seen from the table, in 1980, the
Swedish social democratic welfare state was the most generous and
the Australian liberal welfare state was the most tight-fisted. One can
also quite easily recognize Esping-Andersen’s classification of welfare
states. In 1980, the most generous welfare states were the social dem-
ocratic countries (except Finland), closely followed by the conservative
countries. Most liberal welfare states (Canada, New Zealand, the United
States and Australia) are found at the bottom of chart 1. In 1980, Italy’s
welfare state looked more like a liberal than a conservative European
welfare model, whereas the liberal United Kingdom was closer to Aus-
tria and Germany than to any of the liberal welfare states.
277
Chart 1 also shows that in terms of generosity, the neat picture of the
three worlds of welfare states has become somewhat blurred in 2010.
The liberal welfare states have remained quite clearly distinctive in the
relatively humble levels of bigheartedness of their welfare states. In-
terestingly, the United Kingdom seems to have become much more of
a liberal welfare state than it used to be, dropping from place 9 in 1980
to 12 in 2010. Some of the social democratic states have become much
less generous too. Sweden, the world’s generosity champion in 1980, fell
5 places and ended at rank 6 in 2010, while Denmark descended from
Chart 1
278
place 3 to 8. Three continental European countries (Belgium, the Neth-

erlands and France) have surpassed the social democratic welfare states
(except Norway) in generosity in 2010. The biggest change is found in
Ireland, where the welfare state generosity index jumps from 25.8 to 35.3,
locating this country at place 5, also above Sweden and Denmark. Even
though the precise ranking of welfare states and the composition of the
models have changed, it is obvious that there are still clear differences
in the quality of welfare states as measured by the generosity index.
The welfare state and income redistribution
The generosity index cannot inform us precisely about the redistribu-

tive features of the welfare states, but it seems reasonable to suspect
that the more generous systems are also more egalitarian. And, indeed,
there is a reasonably strong negative correlation between how generous
welfare states are and how much inequality they produce (Jensen and
Van Kersbergen 2016). The OECD (2014) has published interesting data
on how welfare states redistribute and which income groups profit rel-
atively most from social benefits. It turns out that welfare states differ
enormously in which income groups they most privilege. The southern
European welfare states transfer a much higher proportion of social
benefits to the highest income group than to the lowest one. Portugal
leads this group of southern European countries, where the lowest in-
come group receives clearly less than what the top receives: 11% of all
cash benefits goes to the bottom 20% earners, whereas 40% goes to the
top 20%. Portugal also has one of the highest levels of inequality.
There are two important causes for this phenomenon. First, most
transfers in these countries are simply not meant to help the poor ex-
clusively, but rather are to cover the social risks of all social strata.
Second, benefits for the retired, disabled and unemployed are often
linked to contribution period and are earnings-related, so that relatively
more goes to the well-off than to the poor. This is especially true for
pensions, and the southern—and some of the continental European—
countries are typically pension states: Italy, Greece and Portugal, but
also France, roughly spend between 13% and 16% of GDP to pensions,
two to three times as much as the social democratic, liberal and some
of the conservative welfare states (Switzerland and the Netherlands),
which typically spend between 3.6% and 7.4% of GDP on pensions. This
279
means that income redistribution in the pension-heavy welfare states

is not from the rich to the poor, but primarily from one period in life to
another. In other words, inequalities produced during working life are
directly reproduced, rather than moderated, in retirement.
This redistributive pattern contrasts sharply with the liberal and
social democratic welfare states, in which the bottom group receives
relatively more than the top. Australia, for instance, clearly targets the
poor as over 42% of total benefits goes to the bottom and only 3.8% goes
to the top. However, given that Australia’s level of inequality is close to
that of Portugal, it is also clear that there is no one-on-one relationship
between the allocation of public benefits to different income groups and
inequality. The main reason is that the relatively high level of transfers
to the bottom income group can be an effect of two different things:
either a high level of overall spending, as in the Nordic countries, or
targeting through means testing (i.e., offering usually minimum bene-
fits exclusively to those who have no other means), as is the case in the
Anglo-Saxon countries.
Another thing to take into account is that much of the effect of the
welfare state on inequality depends on how social benefits and services
are financed and allocated. The universalist and comprehensive tax-fi-
nanced systems that are characteristic of the social democratic model
turn out to be much more redistributive than the targeted systems, even
if there is no progressivity in taxation (see Rothstein 1998). In a way,
this is counterintuitive because these welfare states are very generous
to the middle class and do not target the poor. In fact, higher income
groups disproportionally profit from social services, especially health
care and education. Hence, one would expect a fully means-tested sys-
tem, in which a disproportional proportion of benefits goes to the poor,
to be much more redistributive. However, means-tested systems tend
to be tight-fisted, whereas social democratic universalist systems dis-
tribute much larger sums of money, and as a result, the latter come out
as much more redistributive than the more targeted and means-tested
ones, a phenomenon called the paradox of redistribution (Korpi and
Palme 1998).
The redistributive effect of the welfare state can be directly measured
by the percentage difference through transfers and taxes between ine-
quality in market income and inequality of disposable income. Income
redistribution is the outcome of public spending on cash benefits, how
much the tax-benefit system targets the poor and the progressivity of
280
the tax system. Adema et al. (2014) have shown that all welfare states
redistribute and lower inequality, at least to some extent, but that the
cross-national differences in the welfare states’ redistributive effects
are large, varying from a decline in inequality of 20% to 30% in the
liberal welfare states to 45% to 47% in Ireland, Slovenia, Finland, Bel-
THE EFFECT OF THE WELFARE STATE

ON INEQUALITY DEPENDS ON HOW SOCIAL
BENEFITS AND SERVICES ARE FINANCED
AND ALLOCATED
gium and Hungary. Interestingly enough, the countries with the lowest
income inequality, namely the social democratic welfare states of Swe-
den, Norway, Finland and Denmark, are not among the countries with
the top redistributive tax-benefit systems. This, first of all, reflects the
fact that these countries have relatively equal market income distribu-
tions in the first place. In addition, the picture is somewhat distorted
because the redistributive impact of the Nordic countries’ extensive
social services financed via taxation are not taken into account (Adema
et al. 2014, 19).
Welfare state adaptation and social investment
Welfare states and welfare state models are not static institutions; on
the contrary, they are continuously updated and adapted to constant-
ly changing social, economic and political circumstances, including
shocks, such as the financial crisis and the economic recession that
followed in its wake. As documented in more detail elsewhere (Van
Kersbergen and Hemerijck 2012; see extensively Hemerijck 2013), all
welfare state models have undergone significant changes in the main
areas relevant to social policies.
In macroeconomic policy, countries have converged around a policy
framework centred on economic stability, hard currencies, low inflation,
sound budgets and debt reduction. The introduction of Economic and
Monetary Union turned monetary policy into a fixed parameter for
policy reform in other fields. Most countries have also responded to
internationalization with wage restraint, usually backed by broad social
pacts between employers, unions and the government. Everywhere,
281
there has been a reorientation of labour market policy towards activa-

tion with a view to maximize labour market participation. All welfare
states have increased work incentives, although not all have managed
to the same extent to accompany this stick with the carrot of human
capital investment.
Another general trend has been labour market deregulation, particu-
larly decreasing job protection, in order to make labour markets more
flexible and to create opportunities for labour market outsiders. There
are, however, large differences between countries in that only some (e.g.,
Denmark and the Netherlands) complemented the flexibilization of la-
bour markets with measures that extend social protection to vulnerable
groups, establishing systems of “flexicurity”. More generally, the trend
in social insurance has been to focus more on labour market (re-)inte-
gration than on income maintenance. Retrenchment of unemployment
protection has been part of the flexibility venture almost everywhere,
although minimum income schemes have been introduced or improved
in a number of countries where these were lacking.
WELFARE STATES ARE CONTINUOUSLY

UPDATED AND ADAPTED TO CONSTANTLY CHANGING
CIRCUMSTANCES, INCLUDING THE FINANCIAL CRISIS
AND THE ECONOMIC RECESSION
Everywhere, reforms have been introduced to make pension systems

sustainable under conditions of low or declining fertility and increasing
life expectancy (see European Commission 2015). Measures include
increasing the retirement age, limiting early exit, introducing occupa-
tional and private pillars on top of the public schemes and redefining
the actuarial links between contributions and benefits. Many countries
have also increased their efforts to assist people in their attempts to
reconcile work and family, for example, by extending child care and pre-
school facilities and other services as well as parental leave provisions.
In Europe, policy reforms in welfare states of various kinds have
often taken inspiration from the idea of social investment. The basic
conviction is that social policies should not just passively compensate
for social mishap, but should more proactively be used to prevent la-
bour market inactivity, to adopt a life course perspective (e.g., life-
long learning) and to promote human capital so as to stimulate both
equality and economic growth. Increasing the capacity of individuals
282
over the life course to remain in employment not only provides a high
level of social security, but also greatly enhances the long-term finan-
cial sustainability of the welfare state. It is in this sense that the term
“investment” must be taken quite literally: an investment in human
capital will yield great returns in terms of money saved on passive
benefits and money earned from taxes and contributions. Investments
in children are particularly promising, because they help smooth ine-
qualities in (cognitive) abilities and health and prevent an accumulation
of disadvantages over the life course, which would otherwise increase
demands on passive welfare (Kvist 2015). The social investment strat-
egy hence aims at developing policies that “help to simultaneously
widen the tax-base, increase fertility, fight poverty and inequality, or
improve the financial sustainability of certain key programmes such as
pension schemes” (Morel et al. 2009, 10). The European Commission
has promoted social investment as the key policy framework to guide
member states in their social policy reforms (European Commission
2013) and to reach the goals of the Europe 2020 strategy for smart,
sustainable and inclusive growth.
The impact of crisis and recession
Before the financial crisis hit, social investment was rapidly becom-
ing the foundation of a new policy paradigm in most if not all welfare
states as well as at the European Union level. One ingredient of the
social investment strategy, namely employment and activation poli-
cies, was adopted everywhere and has helped to increase labour force
participation, especially among women and older men. The economic
recession, however, has greatly amplified the financial pressure on the
welfare state, both by multiplying the number of people on benefits
and by decreasing the financial contributions for social policy. Virtu-
ally everywhere this has led governments to increase their austerity
policy efforts and to retrench on social entitlements so as to help re-
balance the public budget. Even though in discourse the social invest-
ment agenda still seems intact, particularly at the European level, it
has also become increasingly clear that social investment policies are
particularly vulnerable to cuts in the short run, precisely because social
investments yield returns only in the longer run, while cost contain-
ment is a necessity now.
283
Let me take as an example the social democratic welfare states, in

which the social investment path has been followed far longer than
anywhere else and where it has become an intrinsic component of the
welfare state paradigm. If one, for example, compares public expendi-
tures, one finds that the social democratic welfare states spend 3-4% of
GDP more than the conservative, liberal and southern European welfare
states on key social investment programmes (education, family benefits
and active labour market programmes). The effects are evident in the
use of public services, where the social democratic welfare states stand
out in the large number of children they enrol in pre-education and
children and adults in education (schools, training institutions, etc.).
The public provision of childcare, education, work-life reconciliation
initiatives and active employment policies not only provide people with
the skills to work, but they also free up time to participate in the labour
market and generate jobs. As a result, labour market participation rates
of men and women are highest in the social democratic welfare states.
Finally, as is well known, income inequality and poverty rates are lowest
in the social democratic countries.
Recent trends, however, seem to indicate a change of direction even
in the social democratic social investment approach, namely a move
away from universalism and inclusive social investment, with rising
selectivity in social policy as an effect of tighter eligibility criteria, more
targeting and privatization. Similarly, focusing on outcomes, there are
signs of rising inequality and poverty as an effect of direct retrenchment
and policy drift, that is, not updating social policies to new needs (see
Van Kersbergen and Kraft 2016). The point to stress here is that if the
social democratic welfare states are finding it already increasingly diffi-
cult to uphold their allegiance to the social investment oriented welfare
state, then it is highly likely that other types of welfare states will find it
close to impossible to remain committed to the social investment path
they had started to follow before the financial crisis.
The financial meltdown of 2008 and the subsequent recession caused
all welfare states to experience similar problems, including rising unem-
ployment, reduced credibility of the banking sector, falling exports and
rising budget deficits. Because of the problem similarity, governments
initially responded in roughly similar ways. The immediate response
was to massively support the financial sector and to protect demand
by continuing existing social policies and introducing temporary meas-
ures to stimulate demand. But bailing out banks, recapitalizing them
284
and a host of other measures to save the financial sector added up to a

very high bill. And on top of that came rising social expenditures and
decreasing taxes and contributions, which put public budgets under
extreme financial pressure.
Interestingly enough, the financial crisis of 2008 and the Great Re-
cession that followed in its wake, for obvious reasons, were not blamed
on the welfare state, at least not initially. In fact, the welfare state was
celebrated for how it cushioned the harmful effects of the crisis as
its automatic stabilizers did exactly what they were meant to do: au-
tomatically stabilize demand and protect people from hardship. But
then something happened, which Mark Blyth (2013) has labelled “the
greatest bait and switch in modern history”: although the fiscal crisis
in European welfare states (except Greece) was a consequence of the
THE RECESSION CAUSED ALL WELFARE STATES

TO EXPERIENCE RISING UNEMPLOYMENT, REDUCED
CREDIBILITY OF THE BANKING SECTOR, FALLING
EXPORTS AND RISING BUDGET DEFICITS
financial crisis, it became progressively portrayed as its cause. Because

states took responsibility for the massive private debt that banks had
caused by socializing it as public debt, the banking crisis was turned
into a sovereign debt crisis, as if it had been the welfare states, rather
than the banks, which had caused the predicament. Thus, the problem
became reformulated as one of excessive (welfare) state spending and
public debt, which had to be battled by a severe politics of austerity in
order to solve the financial crisis and stimulate the economy.
As a result, the political conviction everywhere became that the costly
initial response to the crisis and the recession was not sustainable in the
long run because it was causing deficit spending to rise dramatically.
This ushered in a period of austerity with a view to restore balanced
budgets and contain public debt. Governments realized, or in some
cases were reminded by the financial markets, that deficit spending
had reached its limits. Consequently, the politics of reform increas-
ingly came to revolve around the question of who was to pay for what,
when and how. In other words, the outcome of these political struggles
determines who will carry the heavy burden of financial and economic
recovery. The crucial political choice virtually everywhere seems to be
founded on the conviction that a swift return to a balanced budget is
285
the only sensible route to economic recovery and that drastic retrench-
ment is the only means to achieve that goal. Governments have already
agreed on significant public spending cuts, which add up to drastic
reforms that particularly hurt social investment policies and induce
new distributional conflicts, although more so in some countries than
in others.
Conclusion
Let me highlight two issues by way of a conclusion. On the one hand,

there has not been a major onslaught against the welfare state in the
immediate wake of the financial crisis. On the other hand, there have
been increasingly drastic spending cuts that seem to undermine the
social investment path that welfare states had chosen to follow. During
the last twenty 20 years or so, welfare states have been continually
adjusting to new economic and social demands, and governments have
pursued, albeit with considerable variation, apparently well-adapted
and innovative social policies, such as social investment. But under
increasing stress, especially in the wake of large budget deficits and
pressures from financial markets, it is not evident that core social pro-
grams can be protected through reform; they may become victims of
the pending distributional battles or of further policy drift.
Welfare states have been remarkably flexible and capable in their
adjustment to their permanently changing environments. Their core
social arrangements remain highly popular so that any attempt at a
radical overhaul continues to meet public resistance. Yet, severe budget-
ary problems, the unpredictable but threatening responses of financial
markets and the real economic consequences of the financial crisis not
only pressure for further reform, but possibly undermine the political
capacity to implement those reforms needed to guarantee the contin-
ued protection of people against social risks that the welfare state has
so far offered.
286
RELATED ARTICLES:


F R O M T H E “I M AGI NED ” TO TH E “P OST- BU R EAU CR ATIC” R EGION
ROBIN SHIELDS is Senior Lec- This chapter examines policy initiatives that aim
turer at the University of Bath, to coordinate and integrate higher education
where he is also Director of
the Doctor of Business Admin- in Europe, focusing on the issue of interna-
istration in Higher Education tional student mobility. From an inter-regional
Management. He holds a PhD
from University of California. perspective, a key priority has been to build
His analysis of global interna- and maintain the preeminence of European
tional student flows received
the George Bereday Award for higher education in relation to North America
the most outstanding article in and East Asia. Intra-regional priorities center
Comparative Education Review
in 2013. Robin has also acted primarily on efforts to support the European
as Principal Investigator on Economic Area. These dynamics are examined
research funded by the Higher
Education Academy, Leadership through three policy initiatives: the Erasmus+
Foundation for Higher Educa- student mobility programme, the Erasmus
tion, and the Dutch Ministry of
Foreign Affairs.
Mundus post-graduate mobility programme,
and the European Higher Education Area.
288
FROM THE “IMAGINED” TO THE

“POST-BUREAUCRATIC” REGION:
THE SEARCH FOR EUROPE IN
HIGHER EDUCATION POLICY
This chapter examines how international student mobility in higher ed-

ucation is used to construct Europe—both geographically and ideologi-
cally. It does so by analysing three distinct but interrelated policy initia-
tives: the Erasmus student mobility programme, the Erasmus Mundus
postgraduate mobility programme and the European Higher Education
Area. My argument is that the search for Europe has been a key con-
cern and goal of international mobility in higher education. However,
that search has entailed two parallel changes in recent years. The first
change has involved a shift from Europe as a shared imaginary—akin to
what Anderson (1983) calls an “imagined community” in his analysis of
the formation of nation-states—to a collective resembling what Heck-
shcher (1994) calls the “post-bureaucratic organization”, characterized
by flexibility, self-organization and continuous internal dialog.
THE SEARCH FOR EUROPE HAS BEEN A

KEY CONCERN AND GOAL OF INTERNATIONAL
MOBILITY IN HIGHER EDUCATION
The second shift has involved an increasing emphasis on the rela-

tionship of Europe with the rest of the world since the construction of
Europe is defined by the interaction between the European and non-Eu-
ropean. Drawing upon data of international student mobility flows, I
show that the benefits of international student mobility have come pri-
marily from inter-regional flows, although both inter- and intra-regional
mobility have experienced rapid growth.
The paper begins by introducing and analysing the Erasmus student
mobility programme, the Erasmus Mundus programme and the Euro-
pean Higher Education programme. It then presents a brief analysis of
trends in international student flows and compares the programmes
to show how they provide evidence of changes in the construction of
Europe through higher education policy. The paper concludes by linking
289
these changes to the changing nature of the search for Europe, both in
higher education policy and in a more general sense.
Erasmus and Erasmus+
The Erasmus student mobility programme represents the long-

est-standing higher education policy at the European level. Since its
inception in 1987, more than 3 million students and 350,000 higher ed-
ucation staff have taken part in mobility funded by the programme
(European Commission 2014a). During the same time, it has expand-
ed from 11 to 33 participating countries, and its budget has increased
from €13 to €550 million (European Commission 2014b). This sustained
growth leads Papatsiba (2006, 98) to declare Erasmus as the “single
most successful component of EU policy”. This view was reflected in the
renewal of the programme, from 2014 to 2020 as Erasmus+, extending
the Erasmus “brand” to include all programmes on education, training,
youth and sport.
ERASMUS SERVES TO DEVELOP A

WORK FORCE THAT HAS EXPERIENCE WORK-
ING ACROSS NATIONAL BORDERS
At its core, the Erasmus programme supports student exchanges be-

tween European universities, particularly by offering student grants
to support international mobility within Europe. Under the Erasmus
programme, European universities can form partnerships (bilateral
agreements), through which their students undertake exchanges of one
or two semesters of study. Because credit systems can vary between
countries, students learning while on exchange are measured by the Eu-
ropean Credit Transfer and Accumulation System (ECTS), with ECTS
credits converted to those used by the home institution upon return.
Erasmus mobility is thus often referred to as “exchange mobility” or
“within cycle mobility”, in contrast to “degree mobility”, in which a full
academic degree is obtained abroad.
Since its inception, the Erasmus programme has seamlessly and si-
multaneously integrated both sociocultural and economic goals. As
motivations for the initiation of Erasmus in 1987, the Council of Min-
isters (1987) referenced both “a view to consolidating the concept of a
290
People’s Europe” and “an adequate pool of manpower with first-hand

experience of economic and social aspects of other Member States”.
In respect to its sociocultural aspects, much research has identified
the use of Erasmus as a means of producing and fostering European
identity through the production of “self-identifying European citizens”
who will support European integration in the future (Mitchell 2012, 494).
However, evidence to date is very mixed on its success in accomplishing
these goals, with studies reporting differing results on whether or not
participation in Erasmus increases a sense of European identity (e.g.,
Siglas 2010; Mitchell 2012).
In addition to its social and cultural goals, the objective of Europe-
an economic integration—and specifically the growth of a mobile and
fully-integrated European workforce—is not far beneath the surface.
From this perspective, Erasmus serves to develop a workforce that has
experience working across national borders within Europe, familiarity
with multiple European cultures and, possibly, competence in multiple
European languages. Concerning workforce development, evidence is
more limited, although the work of Parey and Waldinger (2010) suggests
that participation in the Erasmus programme increases future mobility
in the labour market.
The intertwined and inseparable processes of identity formation
and economic integration closely resemble the process of nation-state
formation described by Anderson (1983) in Imagined Communities. Ac-
cording to Anderson (1983), nation-states are “imagined communities”
in the sense that their members “will never know most of their fel-
low-members, meet them or even hear of them, yet in the minds of
each lives the image of their communion” (6). While acknowledging the
limitations of direct analogies between the construction of Europe and
the nation-state (Decker 2002; Siglas 2010), the concept of the imagined
community applies very well to the rationales articulated in the Eras-
mus programme. Much as the advent of mass education systems was
integral to producing the imagined community of the nation-state, the
Erasmus programme aims to produce an imagined European identity
that would facilitate economic and social integration. The ideological
appeal of higher education—particularly its foundation in the search
for universal knowledge—makes it an ideal medium for constructing
identities that claim an equal or superior status to nationality.
With respect to the construction of Europe through higher education
policy, three key features of the Erasmus programme are (i) a focus on
291
constructing Europe primarily in an intra-regional sense, by stimulat-

ing and fostering a sense of European identity among European youth;
(ii) the prominence and importance of a common European identity
through a shared imaginary; and (iii) strong institutional support, for
example, from the European Commission, which commits to the ongo-
ing funding of Erasmus mobility without the expectation of developing
self-funding or market-based funding in the future. As discussed below,
these three key features of the Erasmus programme are a useful refer-
ence point to analyse subsequent changes in policy on mobility. The long
history and widely acknowledged success of the Erasmus programme
provided a strong foundation for European higher education policy-
making in other areas, especially inter-regional mobility.
Erasmus Mundus
Unlike the Erasmus programme, the Erasmus Mundus programme

focuses on mobility between European and non-European countries.
More specifically, it funds and facilitates the establishment of Erasmus
Mundus Joint Masters Degrees (EMJMDs), which are designed and
delivered by a consortia of three or more European universities. These
masters programmes are supported by student scholarships (typically
13 to 20 per EMJMD) and funding for visiting lecturers and scholars.
The scholarships support the mobility of students from non-European
countries, with a large share of funds earmarked for students from
“partner countries” (i.e., those that receive funding from EU develop-
ment programmes).
By guaranteeing a supply of fully-funded, well-prepared, post-grad-
uate students, the Erasmus Mundus programme essentially “primes
the pump” for the EMJMDs, which will offer the potential of recruiting
larger numbers of self-funded students in the future. The programme
was launched in 2004, renewed in 2009, and is now a partner of the
larger Erasmus+ programme for education, youth, training and sport
from 2014 to 2020. As of 2013, 285 joint degree programmes had been
funded by the Erasmus Mundus programme, with 180 on offer in the
2014/15 academic year (European Commission 2014a). In addition, some
13,957 scholarships have been funded by the programme since 2004,
with India (1,519), China (1,339) and Brazil (578) comprising the largest
sending countries (European Commission 2013).
292
Rather than constructing Europe through internal mobility, Eras-

mus Mundus clearly focuses on the relationship between Europe and
the world. Thus, instead of a shared imaginary, engagement with third
countries (i.e., inter-regionalism) provides a mirror in which the vision
of Europe is reflected. European-ness is defined less by interaction
within Europe than by how Europe engages with the rest of the world.
Although intra-regional integration is promoted through EMJMDPs and
the cross-national collaboration they entail, this internal cooperation is
no longer an end in itself but instead becomes a means to improve the
attractiveness of European higher education from an external perspec-
tive. In emphasizing the need to attract students from around the world,
the Erasmus Mundus programme introduces an interest in promoting
the success of European higher education in a globally competitive
environment.
The European Higher Education Area
The European Higher Education Area (EHEA) is an initiative of 47

higher education ministries, which aims to reform national higher ed-
ucation systems to improve the comparability and compatibility of de-
grees. It was launched with the Bologna Declaration in 1999, in which
29 European countries started a decade-long process of ministerial
conferences that focused on the mutual recognition of degrees and cred-
it transfers. The Bologna Process culminated in the formation of the
EHEA in 2010, by which time the initiative had expanded to include 47
countries, reaching well outside the borders of the EU to include Turkey,
Kazakhstan and Azerbaijan.
While the EHEA entails a set of broad changes that increases the
comparability and compatibility of higher education institutions, Papat-
siba notes that “the promotion of mobility is clearly the most concrete,
easily interpreted and uncontroversial aim” of the EHEA. Mobility is
considered on two respects: first, maintaining and developing Europe
as a destination for students from outside the EHEA (inter-regional mo-
bility), particularly in relation to competing destinations such as North
America, Australia and, increasingly, East Asia (Teichler 2012; Croché
2009); and second, furthering the longstanding goal of internal mobility
first promoted by Erasmus in 1987. However, rather than funding such
mobility directly, the EHEA promotes mobility by lowering barriers and
293
increasing compatibility. It proposes a three-cycle degree system (i.e.,

Bachelors, Masters and Doctoral degrees) with common credit systems
and degree lengths. The rationale is that these commonalities should
promote mobility both within cycles (e.g., studying abroad or trans-
ferring in the middle of a degree) and between cycles (e.g., completing
bachelors and masters degrees in different countries).
Unlike the Erasmus student mobility and Erasmus Mundus pro-
grammes, the European Higher Education Area is not an initiative of
the European Commission, although the Commission has been directly
involved and supportive since its inception (Keeling 2006). Instead, it is
coordinated by a rotating secretariat and executive chair, with implemen-
tation of and adherence to the work programme largely delegated to the
higher education ministries of its members. As Papatsiba (2006) notes,
the EHEA is not a binding agreement and therefore relies on the shared
self-interests of its members to provide impetus for the reforms entailed.
EHEA AIMS TO REFORM NATIONAL HIGHER

EDUCATION SYSTEMS TO IMPROVE THE COMPARABIL-
ITY AND COMPATIBILITY OF DEGREES
Research on the EHEA has noted its similarities to the project of

European Economic Integration (i.e., the European Economic Com-
munity and the Eurozone), with a common currency (ECTS) and free
movement of people (Wachter 2004). However, the ways in which the
EHEA differs from other initiatives in European integration is of equal
interest, particularly in understanding its methods for the construction
of Europe. For example, the organizational model of the EHEA is nota-
bly different from that of the European Union. While the latter has been
driven by a relatively strong institution (the European Commission),
to which powers are delegated from member states, the organization
of the EHEA is far more flexible and ambiguous. Unlike the European
Commission—which has substantial purview over its members’ policies
through its policy directives and regulations—the EHEA works only by
establishing agreement on and commitment to harmonization princi-
ples (i.e., recognition of ECTS, agreement on the three-cycle system of
bachelors, masters and doctoral degrees and corresponding numbers
of credits), which are implemented by members.
Jayasuriya (2008) and Robertson (2010) use the label “Regulatory
Regionalism” to describe the flexible and largely non-institutionalised
294
model of governance employed by the EHEA. In Jayasuriya’s words,

this approach relies
more on the active participation of national agencies in the practices of
regulation than on formal international treaties or international organi-
sations for their enforcement […] a decisive characteristic of these new
modes of governance […] is the reliance on the national application or
ownership of internationally formulated standards (Jayasuriya 2008, 22).
Rather than scaling up traditional functions of the nation-state (i.e.,

higher education policy) to the regional level, regulatory regionalism
embeds regional objectives within national policy-making. Key to this
form of governance are what Jayasuriya (2010) terms accountability
communities, which are processes and forms of interaction that ensure
national compliance and adherence to regional priorities.
This approach to regional organization also resembles what Heckscher
(1994) calls the post-bureaucratic type, in which authority and control are
not exercised by central hierarchies but rather operate through ongoing
dialog, network structures and systemic patterns of preference and be-
haviour. Features of the EHEA, such as the ongoing ministerial confer-
ences (ongoing dialog), nationally-led implementation (non-hierarchical
structures) and an open and flexible approach to membership (extending
well outside most geographic definitions of Europe), suggest that a form
of organization that in many ways resembles Heckscher’s “ideal type” is
emerging in the realm of higher education policy. Mutual self-interest—
rather than binding agreements or powers scaled “up” to the regional
institution—drives the process forward and ensures the cohesiveness of
the region. Some evidence of the ability of this form of organization to coor-
dinate regionalization is provided in trends in international student flows.
Policy and Trends in European Student Mobility
The changes discussed above have taken place in the context of un-
precedented growth in international student mobility. In 1999 (the first
year for which data are available), approximately 1.4 million students
undertook degree level studies outside their home country; by 2012, this
number had increased to over 3.5 million students.
A key objective of both Erasmus Mundus and the EHEA is increas-
ing the “attractiveness” of European higher education, which is often
295
operationalized through its choice as a destination for international study

(Croché 2009; Wächter 2004). Chart 1 displays growth in inter-regional
international students in the EHEA and to Erasmus programme coun-
tries, using 1999 as a baseline, with global growth indicated as a reference.
Inter-regional students include only those whose country of origin (i.e.,
the country of prior residence or study) is outside EHEA or Erasmus
programme countries. These data—collected by a collaboration between
UNESCO Institute for Statistics, OECD and Eurostat and reported by
UNESCO—measure degree mobile students, that is, those who go abroad
to complete a whole degree-level qualification. Thus, students on short-
term exchange programmes, including Erasmus student mobility, would
not be counted (although those on EMJMDPs would be included).
Trends show that inter-regional mobility grew steadily between 1999
and 2012. Additionally, the growth of inter-regional mobility to the
EHEA outpaced global growth in international student numbers, which
Chart 1. Trends in inter-regional degree mobile international students, 1999-2012. Data

from 1999 are used as a baseline (100%). Degree mobile students include only those who
undertake a full degree abroad, and do not include exchange students. Data show that stu-
dent-flows from other regions to the EHEA have outpaced global growth in international
student mobility.
296
was very strong itself. Thus, in inter-regional terms, the EHEA can be
considered a fairly effective initiative insofar as its formation has been
associated with very high growth in inter-regional student flows, a key
measure of the “attractiveness” it seeks.
Both figures highlight the phenomenal growth in mobility, both in
Europe and globally. Thus, even the programmes and regions that have
experienced lower growth in relative terms have experienced strong
growth in absolute terms. This growth is also evident in the Erasmus
programme, which relies heavily on grants funded by the European
Commission rather than more market-based (self-funded) mobility.
Erasmus mobility has nearly doubled since 1999. However, these trends
suggest that the primary benefits of international student mobility have
been in inter- rather than intra-regional terms. While the EHEA is also
supportive of intra-regional integration by encouraging a flexible and
mobile European workforce (Papatsiba, 2006), evidence suggests that
Chart 2. Trends in intra-regional mobility. Degree mobile students are those undertaking
a full degree abroad (either in Erasmus programme countries or the larger set of EHEA
countries). Erasmus exchange students are those undertaking short-term mobility (with-
in a degree programme) through the Erasmus programme. All types of mobility have in-
creased, although at a slower pace than global international student mobility.
297
growth in this area has been more limited than the development of the
EHEA as a destination for students from other regions of the world. In
this respect, the EHEA has outpaced the global growth in international
student mobility.
The analysis provided above shows that, in most senses, inter-region-
al growth has outpaced intra-regional growth, and development of the
EHEA as a destination for inter-regional students is the only area in
which European student mobility has outpaced global mobility growth.
However, it is important to use caution when applying this evidence to
the interpretation of higher education policies on mobility. The data alone
are not sufficient to establish cause and effect, but rather provide an
indication of the trends that have accompanied policy implementation.
Analysis: Change and Continuity in European Higher Education Policy
In order to best interpret how higher education and international

mobility are used in the search for Europe, it is helpful to first identi-
fy the points of difference and commonality in the policies discussed
above. First, these three initiatives share a point of commonality in
that they do not seek complete integration of higher education, im-
plicitly acknowledging this would “neither be desirable nor achievable”
(Paptsiba 2006, 96). Instead, they are all premised on the duality of
national independence and European integration. In other words, the
European dimension does not erode or supersede the authority of the
nation-state, but rather works through it. In Hartman’s words, region-
alism in higher education “penetrates borders without dissolving them”
(Hartman 2008, 209), and the primacy of the nation is maintained in
the construction of the region.
Second, it is important to note that all the initiatives discussed above
remain active contemporaneously. Rather than new initiatives super-
seding their predecessors, the programmes are largely complemen-
tary in nature and provide a structure of mutual legitimation and re-
inforcement. For example, the Erasmus student mobility programme
first established a systems of credit transfers (ECTS) that would later
become the basis for the EHEA. Similarly, a key goal of the Erasmus
Mundus programme is to “increase the quality and the attractiveness
of the European Higher Education Area” (European Commission 2015,
93). However, although the three initiatives discussed above coexist and
298
reinforce one another, they also evince a shifting emphasis in how Eu-
rope is understood. Concerns that were not considered relevant at the
inception of Erasmus (global competition and self-sustained funding)
become central in the Erasmus Mundus programme and the European
Higher Education Area.1
Third, the three policy initiatives demonstrate shifts in the model of
support and involvement from European institutions. Erasmus student
mobility has been initiated, coordinated and funded by institutions of
the European Union (i.e., the European Commission), with implementa-
tion delegated to the national level and universities. Thus, the Europe-
an institution plays a strong, central role in the ongoing operation and
funding of the programme, very similar to that of national governments
in welfare states. There is no expectation that the programme would
function without direct and continuing institutional support. However,
THE CHANGES REFLECT REDUCED

RELIANCE ON INSTITUTIONS AND MORE CONCERN
OVER THE ROLE OF EUROPE WORLDWIDE, AND
NOT ONLY FOR ITS OWN INTERESTS
in the Erasmus Mundus programme, the role of European institutions

is much more limited: instead of ongoing funding for programmes, the
European Commission “primes the pump” by guaranteeing a supply of
internationally mobile students through the scholarship programme.
The supply-side focus of Erasmus Mundus contrasts quite starkly with
the institutionally-led model of Erasmus European mobility, although
the two operate through very similar mechanisms (i.e., scholarships for
mobility). With the EHEA, the role of European institutions is further re-
duced: rather than a central actor that coordinates regional integration,
the European Commission becomes a member in a larger process—iron-
ically holding a status that is nominally equal to its own member states.
Fourth, policymaking in relation to mobility displays a clear shift
from an intra-regional to an inter-regional focus. The Erasmus stu-
dent mobility initiative displays virtually no concern for Europe in an
1 I t is interesting to note that more recent policy documents on the Erasmus programme
speak favourably of “Zero Grant” students—those who were unable to obtain a grant for
their mobility and so use their own funds instead. This also indicates a shift towards a
self-funding mechanisms within the Erasmus programme.
299
inter-regional perspective; instead, the focus is entirely on fostering and

mobilizing mobility within the region. However, the inter-regional focus
of Erasmus Mundus and the EHEA is very clearly on the relationship
between Europe and other regions of the world, and it is closely con-
nected to the “attractiveness” of European Higher Education, that is,
its ability to attract students from other parts of the world.
Cross-cutting analysis of the initiatives and trends discussed above
thus reveals both continuity and change. It is important to keep in mind
that there have been few radical disjunctures or reversals in mobili-
ty-related policies. However, it is equally important to note that where
change has occurred, it has consistently been in the direction of pro-
grammes that rely less on formal institutions, are more market-oriented
and are more concerned with Europe in the world rather than Europe
in itself. These models of regional coordination and governance could
hold important implications for the wider search for Europe.
Higher Education Policy and the Search for Europe
The search for Europe, as it has unfolded in the domain of higher ed-
ucation policy, raises interesting questions about the changing ways
in which Europe as a region is constructed and defined. Specifically,
the shift from institutionally-led to self-organizing forms of regional
integration and governance raises the question of whether Europe in a
larger sense relies upon institutions and a shared identity that under-
pins them. Conversely, is it possible to have “Europe” without European
institutions and a European identity?
To date, Europe integration has adopted many of the tradition sym-
bols of the nation: flag, currency and—through programmes such as
Erasmus—an “imagined community” or shared identity. However, wide-
spread social and economic changes call into question the durability
and necessity of these symbols as a basis for regional integration. In
many areas of social and economic life, forms of organization that have
traditionally been institutionally-led are coordinated through more
flexible and self-organizing approaches. Just as decentralized systems
such as Bitcoin hint at the possibility of currency without institutional
management, the recent trends in higher education policy discussed
above suggest that more self-organizing approaches to regionalism may
be possible. This approach relies upon common self-interests among
300
regional members and non-hierarchical approaches to implementation,

rather an institutional bureaucracy.
The current model of regional integration in Europe—that is, a strong
regional institution underpinned by a shared imaginary—may undergo
profound transformation, becoming less institutionally-based and less
reliant on a shared identity. This is not due to a shortcoming or failure
of the particular institutions and approaches of European integration,
but rather because the models on which this approach is based are
themselves undergoing profound transformation. Changes in higher
education policy with respect to international student mobility suggest
that such a transformation does not take place in the form of a radical
disjuncture, but rather through a gradual shift in which institutional-
ly-led models coexist with a shift towards forms of organization that
more resemble the post-bureaucratic type.
Furthermore, changes in the construction of Europe through student
mobility establish the region less through its internal constitution than
through its interface to and engagement with other regions (i.e., in-
ter-regional dynamics). Europe is defined much less through its internal
identity than through its encounter with the non-European, which in
many senses becomes a mirror in which the region appears. These
changes suggest a future in which some cornerstones of regional or-
ganization to date—identity and institutions—will become less neces-
sary and foundational to the construction of the region, bringing new
complexity and possibilities to the search for Europe.
RELATED ARTICLES:

301
M US L I M S I N E URO P E: TH E CO NSTRUC TION OF A “PR OB LEM”
BICHARA KHADER is Pro- Some 25 million Muslims live in the 28 Member

fessor Emeritus at the Catho-
States of the EU. The vast majority of them
lic University of Louvain and
Founder of the Study and Re- came seeking work and were needed for sectors
search Centre on the Contem- referred to as “difficult, dirty and dangerous”. In
porary Arab World. He has been
a member of the Group of High the 80's, they started to be perceived not as im-
Experts on European Foreign migrants, but as “Muslims”, eventually threatening
Policy and Common Security
(European Commission) and the social fabric of European societies. The terror-
Member of the Group of Wise- ist attacks by tiny groups of Islamist fanatics and
men on cultural dialogue in the
Mediterranean (European Presi- the radicalisation of thousands of native Muslim
dency). Currently he is a visiting Europeans added fuel to the surging anti-Muslim
professor at various Arab and
European universities. He has sentiment in Europe. Unless there is a simulta-
published almost 30 books on neous effort by immigrants to better integrate
the Arab World, the Euro-Arab,
Euro-Mediterranean and the Eu- in European societies and by the latter to show
ro-Palestinian relations. openness, tensions may become worrisome.
302
MUSLIMS IN EUROPE:
THE CONSTRUCTION OF
A “PROBLEM”
The presence of some 25 million Muslims in the 28 countries of the

European Union is currently sparking debate, controversy, fear and
even hatred. Never before have we witnessed such a climate of mutual
suspicion between Muslims and mainstream European societies. Pub-
lic opinion surveys in Europe show increasing fear and opposition to
European Muslims, who are perceived as a threat to national identity,
domestic security and the social fabric. Muslims, on the other hand,
are convinced that the majority of Europeans reject their presence and
vilify and caricaturise their religion.
SURVEYS SHOW INCREASING

FEAR TOWARDS EUROPEAN MUSLIMS,
WHO BELIEVE THAT EUROPEANS
CARICATURISE THEIR RELIGION
Such a misunderstanding is worrisome as it fuels dangerous Islam-

ophobia, on the one hand, and radicalisation, on the other. European
states are alarmed by these developments since they place harmonious
cohabitation in jeopardy. Consequently, they have taken measures and
enacted laws to combat extremist forces, curb radicalisation and im-
prove Muslims’ integration into the receiving countries.
However the situation is not simple. How could Europe encourage
Muslim integration into secular states? Are radicalisation and extrem-
ism linked to economic marginalisation? Are they a product of a narra-
tive that divides the world into two camps: us and them? Is extremism
is only faith-based? If so, why did an extremist Norwegian kill, in 2011,
dozens of his compatriots who were not Muslims? European states
continue to grapple with these thorny questions without being able to
devise a coherent response.
My arguments are that Muslims are settling permanently in Europe,
that the vast majority want to live in peace, that European integration
303
policies have been erratic and inconsistent and that only a tiny minor-
ity of Muslims are engaged in radical activities. I also argue that in
addition to faith-based radicalisation (religiously-motivated groups or
individuals), there is an identity-based extremism (far-right parties),
which is no less dangerous, and Europe should confront both problems
by drying up the ideological sources of extremism. Finally, I make the
point that Islamist radicalism in Europe remains marginal. This rad-
icalism is not the result of failed integration, but rather local-global
connections, which are linked to identity rupture and the exposure of
young European Muslims to the unbearable images of destruction and
violence in many Muslim countries, mainly those in the Middle East.
Whether this violence is the result of Western intervention, such as the
invasion of Iraq and the Israeli offensives in Gaza, or the result of the
assault of Muslim regimes on their own populations, such as in Iraq or
Syria, is irrelevant.
The Muslim population in the EU is mainly linked to migration dynamics
The presence of Muslims in Europe is not a new phenomenon. Starting

in 711, Muslims conquered large swathes of Northern Mediterranean
shores and set up Caliphates and Emirates mainly in the Iberian Pen-
insula for more than seven centuries. The fall of the last Emirate of
Granada, in 1492, marked the end of Muslim political rule in Spain. Later,
the Inquisition led to the very expulsion of Muslims, Sefardi Jews and
converted Spaniards.
Almost concomitantly, in the Eastern Mediterranean, Islamised Otto-
mans defeated the Greeks, ejected them from Anatolia, took Constan-
tinople (1453), which later became Istanbul, and conquered the Balkan
region. Balkan States achieved their independence in the 19th century,
before the dismantlement of the Ottoman Empire in the aftermath of
the First World War. Muslim Bosnians, Albanians and Kosovars have
not been expelled, and nowadays, they constitute Europe’s indigenous
Muslim population.
This article specifically tackles the issue of Muslims who immigrated
to Europe after the Second World War and who now represent the bulk
of the European Union’s Muslims. Indeed, as European states start-
ed their reconstruction at the end of the war, they resorted to their
ex-colonies to offset labour shortages. Hundreds of thousands of North
Africans, most of them Berbers from traditionally rural areas of the
304
Rif Mountains, immigrated to France. Indonesians and Surinamese

went to Holland, and Indians, Pakistanis and Bangladeshis entered
the United Kingdom. The case of Germany is more specific since it has
been the main destination of Turkish and Kurdish labour immigrants,
although Turkey was not a German colony, but simply an ally in the
First World War.
Obviously, not all labour migrants in the 1950s were Muslims, but
given that the immediate belt surrounding Europe consists of Northern
African and Middle Eastern Muslim countries, most of which have been
colonised by European countries, it is no wonder that the majority of
foreign labour migrants in Europe are Muslims. Those migrants left
their countries in the 1950s and 1960s in search of work, social advan-
tages and higher wages. The vast majority of these first generation
migrants were young. They did not intend to settle permanently but
hoped to accumulate sufficient savings, which would allow them to build
a house, open a shop, buy a taxi, etc. and prepare a winning return
to their home country. Since their stay was seen as temporary, these
migrants, whether single or married, sent home almost 80% of their
salaries to their families as remittances.
On the whole, these migrants contributed to the economic boom of
many European states as they built roads and railroads, worked in the
coal mines, cleaned streets and offices and, on the whole, did the jobs
that Europeans were reluctant to do. Until 1970, there was neither a
migration “problem” nor, a fortiori, a Muslim “problem” in Western
Europe. Migrants were largely invisible in public places. They had no
specific demands related to their religion as they did not intend to settle
permanently, and they did not suffer from discrimination or prejudice
as they were contributing to the well-being of European societies. There
was no Islamophobia, although class racism did exist. In summary, mi-
gration was seen as a gift, not as a burden and even less as a threat.
In the early 1970s, the European economic boom came to a halt. The
oil crisis of 1973 was the “straw that broke the camel’s back”, as the
Arabs say. From that year on, European states enacted laws restricting
regular migration but, at the same time, relaxing restrictions of family
reunification. Immigrants hurried to bring over their families. These
measures produced significant quantitative and qualitative effects. Sta-
tistically, the sheer size of the migrant population increased consider-
ably in the 1970s and the 1980s. Economically, the number of workers
among migrants dwindled drastically. Sociologically, there has been a
305
process of feminisation of the migration stocks while the presence of

children inaugurated the second-generation phase.
All of these transformations produced unforeseen effects. First, the
arrival of families from rural areas changed the immigrants’ attitudes
towards religious and cultural values. While temporary workers ac-
cepted “basement mosques” (les mosquées des caves) as a temporary
solution to their prayer needs, the sedentarised immigrants asked for
mosques and minarets. Secondly, the visibility of migrants in public
space increased (veiled women, children going to school, etc.) Thirdly,
immigrant families congregated in certain areas where they could find
informal support structures and social networks. Families could thus
keep in constant contact with their home countries by phone, internet
or travel.
THE EU FACES A DAUNTING CHALLENGE,

SINCE DEFENSIVE AND PROTECTIVE POLICIES IN THE
MEDITERRANEAN DID NOT SUCCEED IN DETERRING ASYLUM
SEEKERS, REFUGEES AND MIGRANTS
Finally, in the last three decades, marriage immigration peaked as the

first and second-generation youth entered the marriage market. To take
just two examples from Holland, between 1995 and 2003, Turkish mar-
riage immigration peaked at 4.000 per year while Moroccan marriage im-
migration hit a record of 3.000 per year. Marriage immigration ensured
continued, high fertility among the immigrant population as many sec-
ond-generation immigrants prefer to marry spouses from their parents’
home countries, who are young, traditional and virgin, rather than mar-
rying a fellow second-generation immigrant like themselves. Obviously,
marriage immigration has maintained the migration dynamic intact.
This significantly differentiates Muslim immigration to Europe with
the Muslim expatriation in the USA on two grounds. First, Muslim
migrants in Europe are, at most, a two to four hour flight from their
home countries, while the distance between the USA and their home
countries gives little choice but to integrate into the American “melting
pot”. Secondly, as Robert Leiken argues, “unlike the American Muslims
who are geographically diffuse, ethnically fragmented and generally
well-off, Europe’s Muslims gather in bleak enclaves with their compa-
triots”. Finally, the rate of mixed marriages in the USA is higher than
in Europe.
306
This differentiation explains, to a certain extent, why Islam and Mus-

lims in the United States are not a major concern while in Europe, at
least since the 1980s, migration has become an issue, mainly because
two-thirds of the migrants are Muslims. Indeed, everything related
to Islam in Europe became a cause of anxiety: the mushrooming of
mosques, women’s veils and new religious fervour. It is in this context
that far-right parties emerged and started to garner support in present-
ing migration as a threat. In reaction, Western European states began
erecting new defences against the much mediatised threat of mass im-
migration by strengthening direct immigration control through severe
visa regimes, internal surveillance and outsourcing border control on
the external borders of the EU.
But all cordons sanitaires put in place could not stop or even slow
the flow of irregular migration from southern countries. The long land
border and coastlines of many European states hindered the effective
policing of frontiers. In many cases, land and maritime controls only
served to displace the routes of migration, making the travel longer
and riskier and making traffickers richer as they showed their ability
to adapt to the new regulations. Southern European countries were
particularly exposed to irregular migration. At the beginning, Spain,
Italy, Greece and Malta were transit countries and “stepping stones”
for other destinations. But later, in the 1990s, they became countries
of final destination for waves of irregular migrants.
Thousands of these irregular migrants lost their lives in an attempt
to reach the perceived “European Eldorado”. But hundred of thousands
made it. They lived in precarious situations, as illegals, irregulars or
indocumentados, but over the years, they have been legalised, in what
Spain has called regularizacion, and Italy, sanatoria. In this respect,
the case of Spain is emblematic as the number of asentados Moroc-
cans, to take just one example, jumped from 50.000 in 1992 to 750.000
in 2015, which is a multiplication by 15. The same happened in Italy.
The so-called “fortress of Europe” proved to be an exercise in fanta-
sy. Undoubtedly, restrictive visa regimes affected legal migration but
triggered irregular migration. Externalised control of migration and
detention camps have not discouraged migrants. It is, therefore, not
surprising that today, there are more than one million Muslims in Spain
and a similar figure in Italy.
The problem has become more acute recently with the substantial
increase of asylum seekers from impoverished or devastated countries
307
in the South, like Syria, Iraq, Afghanistan, Eritrea and even the Gaza
Strip. While the Mediterranean is being transformed into a ceme-
tery of drowned dreams, European countries are bickering about the
cost-sharing of land borders and coastline policing and about distrib-
uting asylum seekers among European states.
Let us recognise that the challenge is daunting since defensive and
protective policies in the Mediterranean did not succeed in deterring
asylum seekers, refugees and migrants. European leaders found them-
selves caught between alarmed rejectionists, who invoke financial costs,
security risks and social challenges and who ask for more muscular pol-
icies to stem the flow of mass immigration, and vocal refugee advocates,
who posit the problem in terms of human dignity and the necessity to
protect, recalling the example of Jordan and Lebanon, which are hosts
to more than a million Syrian refugees each.
There is no doubt that the situation is difficult to manage. On the one
hand, in face of the magnitude of the human tragedy, Europe cannot
remain blind, deaf and with its arms crossed. On the other, it cannot
leave its doors wide open to the misery of the world. This historical
review clearly shows that through natural increase and new migration
flows, in all their forms, the Muslim population is increasing rapidly in
the European Union to the bewilderment of European states, caught
off guard by the sheer numbers of refugees and asylum seekers. One
can easily bet that the anxieties which surround the migration issue
will not vanish as long as neighbouring Muslim countries remain fe-
verish and destabilised and as long as European Islam is constructed
as a problem.
Who are the Muslims in Europe?
Muslims in Europe fall into six categories:

1) I ndigenous Muslims who have lived in Europe for many centuries,
mainly in Bosnia, Albania and Kosovo, where Islam is a foundational
element of their history, but also in Romania and Bulgaria, where
they are a native minority, and Poland and Crimea, which is home
to an old Tatar Muslim population.
2) S tudents and businessmen who come from Muslim countries. In
France alone, there are some 70.000 North African students, and
London is the capital of Arab and Muslim businessmen.
308
3) M
uslims who entered initially without restriction, such as the Com-
monwealth citizens in Great Britain, Algerians in France or Suri-
namese and Indonesians in Holland.
4) M
uslims who came to Western Europe, in the 1950s and the 1960s,
as labour migrants.
5) E
uropean Muslims who are born in Europe to migrant parents.
6) A
nd, finally, asylum seekers and refugees, whose numbers have sub-
stantially increased in the last three years. From January to August
2015, 235.000 refugees poured into Europe, the majority of them
from neighbouring Muslim countries.
We don’t include in these categories the 30 million Muslims of the
Russian Federation, which includes many Muslim countries. In this ar-
EUROPEANS GREATLY OVERESTIMATE

THE SHARE OF MUSLIMS IN THE TOTAL POPULATION:
THE FRENCH ESTIMATED IT AT 31% IN FRANCE , WHILE
IT DOES NOT EXCEED 6%
ticle, we shall deal only with Muslims of migrant origin in the European
Union. They fall into three categories: a) those who are registered as
foreigners; (b) those who acquired the nationality of the country where
they live and work; and, finally, (c) those who are native European,
On the whole, I estimate that there are some 23 million Muslims living
in the 28 European states, three-quarters of whom are already Europe-
an citizens by naturalisation or birth. To these numbers, we may add
some 2 million Muslims who migrated illegally and have not yet been
officially legalised. This makes a total of 25 million Muslims, some 5%
of the total European population.
These numbers are not threatening. And yet there is a widespread
sentiment that Europe is being invaded by a growing Muslim popula-
tion that cannot or will not be assimilated and that dreams, as blogger
Agnon de Albatros argues, of “implementing Shari’a law in Europe
and making this infidel continent part of the domain of Islam” (www.
albatros.org). Thus, the Muslim demographic is becoming a central
theme of many books, in which Muslims are perceived as posing “the
most acute problems on account of their religion and their numbers”
(Christopher Galdwell). Right wing parties are not saying anything
else. “Against the Islamisation of Europe” was the slogan chanted by
the Pegida German protesters in Dresden, in 2015.
309
Is there a reason for concern? For many Europeans, the answer is

yes, not only because of the increasing number of Muslims in Europe,
but also because Europeans greatly overestimate the share of Muslims
in the total population. A 2014 poll from the Social Research Institute
found that French respondents estimated the percentage of Muslims in
France at 31%, while the real percentage does not exceed 6%. Germans
gave the percentage at 19% in spite of the actual 4%.
Some demographers are not less anxious. They recognise that the
total Muslim population is projected to jump from 25 to 35 million be-
tween 2015 and 2035. They invoke both internal and external factors.
Among the internal factors, they pinpoint the higher fertility rates
among Muslim Women and the fact that Muslim population is younger:
people under the age of 30 represent 50% of the Muslim population in
2015, compared with about 33% in the non-Muslim European population.
They also argue that Muslim women marry in larger numbers and at
younger age and divorce less than their non-Muslim counterparts.
To these internal factors, one must add net migration influx. In spite
of its economic crisis, the EU remains a migration magnet for Arabs,
Sub-Saharan Africans, Asians, etc. Recent events in the Mediterra-
nean, in 2015, clearly indicate that both “push” and “pull” factors are
still at play. As a matter of fact, current migration pressures are not
caused exclusively by external push factors, such as poverty, conflict
and repression. The current focus on push factors diverts attention
away from significant pull factors, such as the very fact that the Eu-
ropean countries are already hosts to significant immigrant or im-
migrant-origin populations, opening new channels for migration. As
Esther Ben David puts it, “the more people emigrate from a certain
town or village, the more likely it becomes that their neighbours […]
will follow in their path”.
To this reality, one has to add travel accessibility, expanding inter-
national networks and the fact that there is still demand at the upper
end of the labour market for highly qualified professionals, and at the
lower end, there is demand for workers in unregulated sectors of the
economy, which depend on a cheap and exploitable workforce to remain
competitive. Clearly, migration pressures from Muslim and non Muslim
countries will not diminish any time soon. Yet, in spite of the projected
increase in Muslim demographics in the EU, in no European country
will the Muslim population exceed 10% of the total population by 2035,
with the exception of France and Belgium.
310
European integration policies and the segregation realities
From the very beginning of labour migration, in the 1950s and 1960s,
European states have adopted different policies with respect to man-
aging their immigrants and integrating them. Some countries, like
Germany, did little in the first decade to facilitate the integration of its
migrants. It viewed them as temporary “guest workers” (geist arbeit-
er). The United Kingdom and the Netherlands embraced the notion of
multiculturalism, by which the governments sought to maintain distinct
cultural identities and customs. France, by contrast, professed a policy
of assimilation by imposing its model of secularism.
THE SOCIAL UNREST WAS ALMOST CONCOMITANT

WITH THE TERRORIST ATTACKS IN MADRID AND
IN LONDON, SERVING AS EYE-OPENERS AND QUES-
TIONING OLD INTEGRATION MODELS
Whatever the model, the immigrants, as I said earlier, gathered in eth-

nic neighbourhoods, called banlieues, in France, and suburbs, in England.
After the economic downturn of the 1970s, and the closure of mines and
factories, immigrants became the first to bear the brunt of the crisis.
Unemployment skyrocketed, leading to widespread riots in the Unit-
ed Kingdom and in France (la révolte des banlieues, in 2005 and 2007).
Although a large number of the rioters appeared to be Muslims, most
observers agree that urban segregation and the lack of opportunity and
upward social mobility were key factors behind the unrest. The social
unrest was almost concomitant with the deadly terrorist attacks in
Madrid, in 2004, and in London, in 2005. France had already suffered
similar terrorist attacks in 1997. Holland and Denmark were not spared,
with the assassination of filmmakers and cartoonists.
These tragic events served as eye-openers. Old integration models
came under attack. Multiculturalism in the UK and in Holland has been
questioned, and gradually, the policy has been abandoned, and govern-
ments have stepped up their efforts to better integrate their Muslim
communities. Germany relaxed its naturalisation policy and allowed
Turks and Kurds to acquire German nationality. Only France stuck to
its secular model.
Undoubtedly, in the last 15 years, the issue of migration and integra-
tion policies has dominated the political and intellectual debate, with
311
two questions gaining particular momentum: Are European Muslims

discriminated and segregated? And, if so, should the European states be
held responsible? The answer obviously varies according to ideological
affiliations and political stands, but let’s stick to the facts. As the bulk
of Muslims are labour immigrants or native-born of immigrant origin,
they are poorer than the national average, and they often live in seg-
regated neighbourhoods. However, it is also true that poverty is often
linked to poor parental control, dropping out of school and the lack of
opportunities. In addition, there was an alarming development in the
1980s. The migrants, whose problems were seen as a consequence of
their socio-economic status during the preceding decades, started to
be perceived as culturally different.
The apparent failure to integrate has been viewed in cultural terms,
that is, as failure to adapt to European culture and to adopt European
norms, values and styles. In other words, Muslims do not integrate
because they are Muslims, and Islam is perceived as incompatible with
Western culture and values. Thus, it is no surprise that Islam has been
constructed as a problem.This shift in perception is synchronic with the
advent, since 1979, of the so-called Islamic revival. Indeed, in the 1960s
and 1970s, the “other” was a labour migrant from Turkey, Morocco,
Algeria or Pakistan, etc.; however, in the 1980s, these migrants became
trapped in one communitarian cage: Islam.
However, there is no one Muslim community in Europe; this is a fantasy.
Muslims come from different countries, live in different countries and
speak different languages. They are immensely divided in their faith, in
their ethnicity and also in their relation to religious practice and to the
role religion plays in their lives. It is therefore erroneous to remove the
migrant from his own condition. A migrant born to Algerian migrant
parents with French nationality is first of all French. So why should we
encage him in a Muslim community supposedly closed and fixed forever?
Speaking constantly of Muslim community means that Islam eclipses
the individual Muslim as the presumed actor of social and political
change. In other words, as Sami Zemni, from the University of Gent,
argues very aptly, “It is not Muslims who produce history, but Islam
that conditions the behaviour and identity of Muslims. [...] In the end
a Muslim is an automatom, endlessly perpetuating the religious pre-
scriptions of Islam”. Such a postulate is both erroneous and dangerous,
not only because Islam assumes the role of an internal enemy in a soci-
etal cold war between European societies and their Muslims, but also
312
Two young Muslim women in Berlin.
because the integration issue is disconnected from the socio-economic

context and becomes the sole responsibility of Muslims.
Happily enough, many Muslims are fighting their way into European
societies and gradually integrating their norms. Many success stories
of Muslims in all sectors, from economy to culture, provide ample proof
that there is no Muslim fatality. Muslims with higher education and
higher wages—like the 300.000 Arabs of the Middle East residing in
London or the Lebanese expatriates in Paris—do not live in segregated
communities and are well integrated in society. Unfortunately, the bulk
of Muslims in Europe are labour migrants or sons of labour migrants
who are badly equipped to better integrate into European societies, not
because of Islam, but because of their socio-economic condition.
Should we, therefore, incriminate official policies for the lack of in-
tegration? I believe so, to a certain extent. There have been shortcom-
ings and even failures in France and elsewhere. Urban policies have
been inadequate. Employment incentives have been limited and job
discrimination insufficiently addressed. All of these shortcomings are
now under review, and measures are being taken, unfortunately, up
until now, with scarce results.
313
Muslim youth of Europe, radicalisation and violence
European states recognise that the vast majority of Muslims in Eu-

rope do not engage in violence or terrorist activities, but, at the same
time, they admit the existence of small cells or “lone wolves”, which are
considered to be radical Islamists, prone to violence and with links to
Al-Qaeda or ISIS (the Islamic State). Personally, I don’t share the the-
ory of the lone wolves because behind each terrorist, there are groups
which provide logistics, ammunition and training. But thorny questions
have to be raised: How does a native European Muslim become radi-
calised? Why?
THE ASSERTION THAT ISLAM IS THE RELIGION

OF THE SWORD, AND THAT OTHER RELIGIONS,
SUCH AS CHRISTIANITY, JUDAISM OR EVEN BUDDISM,
ARE RELIGIONS OF PEACE IS GROSSLY MISLEADING
The radicalisation of some home-grown Muslim youth can take place

in radical mosques, in prison, during long stays in Muslim countries or
through the internet. The 2004 Madrid bombing, which killed 192 people,
was carried out by North Africans, mostly Moroccans, who were resi-
dents in Spain, but some, reportedly, had links with a Moroccan terrorist
group affiliated with Al-Qaeda. Three of the four perpetrators of the
2005 London attacks were home-grown, second-generation British Mus-
lims trained in Pakistan. Merah, the French terrorist who killed three
soldiers and three Jewish youth in Toulouse, and those who assassinated
Charlie Hebdo’s cartoonists and Jewish shoppers were second-genera-
tion French Muslims of Algerian descent. Moreover, some young Muslim
jihadists who join ISIS in Syria and Iraq are born and educated in Euro-
pean countries, and many of them are even European Muslim converts.
Why, then, does a tiny minority of Muslim European youth engage in
violence? Answers tend to differ significantly. One school of thought
adopts a culturalist view, which links terrorism, jihadism and extrem-
ism to the Islamic religion itself. For its proponents, violence is consub-
stantial to Islam since most of the modern conflicts are taking place in
Muslim countries and since the majority of terrorist groups are Mus-
lims, such as al-Qaeda, ISIS, Boko Haram, Somali Al-Shabab, etc.
A second school of thought, considered to be realist, asserts that the
failure of European governments to fully integrate Muslim communities
314
leaves some European Muslims more vulnerable to jihadist ideologies.

Some young people feel so left behind and alienated that they turn to
Islam as a badge of cultural identity. In a recent interview, Salman Rush-
die explained the following: “Give a Kalachnikov and a black uniform to
an unemployed youth, who is vulnerable and disadvantaged, and you
confer to him a power” (Le Vif Express, 14 - 20, August 2015).
Clearly, these arguments are not convincing. The assertion that Islam
is the religion of the sword (religion de l’épée), and, by contrast, that
other religions, such as Christianity, Judaism or even Buddism, are reli-
gions of peace (religions de la paix) is grossly misleading and historically
erroneous. For centuries, religious wars split European countries apart.
Nowadays, Buddhist monks organise mass killings and deportations
of Muslims in Myanmar, and Jewish extremists colonise Palestine and
abuse secular Jews in the name of God.
But neither is the other argument totally credible. First, there are
millions of immigrants who suffer from segregation, discrimination
and lack of opportunities but who do not engage in terrorist activities.
Secondly, some terrorist attacks, like those carried out in the US in
2001, were perpetrated by well-educated and economically comfortable
individuals. And thirdly, among those who join ISIS in Syria and Iraq,
one can find entire families or even converts.
In my humble opinion, four factors might help fully grasp the gradual
process of radicalisation. The first is identity-based radicalisation. For
many young Muslims of migrant origin, whether left behind or fully in-
tegrated, there is a widespread feeling that they are not fully accepted
as fellow citizens. After three generations, a French citizen of Algerian
descent is still perceived as an Algerian and a Muslim. He may never
have visited Algeria, and he may be a non-believer, but he is still per-
ceived as an alien. Clearly, some Muslim youth feel torn apart between
a country of origin they don’t know and their home countries (France,
Belgium or Germany) that turn their back on them. It is no small won-
der that some youth curse the country in which they are born and raised.
The second factor is socio-economic based radicalisation. This form of
radicalisation is related to the socio-economic grievances harboured by
second and third-generation Muslims. Undoubtedly, the lack of oppor-
tunities is linked to objective failures like poor education and training.
Others are linked to job discrimination. For example, a friend of mine,
a young Algerian Muslim and an excellent engineer, sent an application
for a job vacancy and signed the letter with his true name. He received
315
an answer that the job was no longer vacant. He sent the same letter
with some slight modifications, including his westernised name, and
he was summoned for an interview. This happens frequently and feeds
the sentiment that university studies are not necessarily a ladder of
social mobility in the case of many Muslims. In the long run, this may
sow the seeds of hatred.
THE MINORITY MUSLIM YOUTH

RADICALISATION IN EUROPE HAS MORE TO DO
WITH TODAY’S GLOBAL-LOCAL CONNECTIONS RATHER
THAN WITH FAILED INTEGRATION
The third factor is the search for a mission. In many cases, we saw ter-
rorists who became suddenly, fervently self-radicalised and fanatically
religious, breaking off from their families and friends and embodying
what Oliver Roy called a “generation rupture”. These self-radicalised
youth pursue a fantasy of heroism, which I called the passage from
“zero to hero”, or, the passage from anonymity to celebrity. “We have
avenged the Prophet Muhammad”, shouted the killers of the Char-
lie-Hebdo cartoonists, in January 2015.
This self-radicalisation is partly due to persistent, socio-economic
challenges, but also to the exposure to social media and to satellite tel-
evision, some of which is generously financed. It is no secret that some
petrodollar-financed satellite channels propagate a literalist reading
of the Koranic texts, indirectly contributing to the forging of a radical
mindset that is prone to see the world with binary logic: Islam versus
the Other, Good versus Evil. Such logic leads to fanaticism and the
rejection of negotiation, dialogue or compromise. Here lies the differ-
ence between a religious radical terrorist who doesn’t negotiate and a
nationalist terrorist who does.
The fourth factor is geopolitical based radicalisation. This relates
to the constant exposure that young European Muslims have of the
sufferings inflicted by the West and its regional allies on fellow Mus-
lims in many parts of the Arab and Muslim worlds. It is not fortuitous
that Al-Qaeda and later ISIS increased their activities in Iraq after
the American invasion in 2003. The three Israeli offensives in Gaza
(2007, 2012 and 2014) produced dramatic resentment among Muslims
against Israel and its western allies, mainly the Americans, who were
accused of having double-standards for standing by Israel, in spite of
316
its continuous breaches of international law and violations of human

rights. But the belief that those terrorists who orchestrated the horrific
attacks in Madrid, London and elsewhere were avenging the suffering
of the Palestinians is wrong and misleading. Palestine has been more of
a justification than a source of radicalisation for some young European,
radical Muslims.
All of these forms of radicalisation may converge or not. We have
seen cases of native European converts engaging in terrorist activities.
The September 11th terrorists were highly skilled and affluent. Many
terrorists are not religious but suddenly become fanatically religious
in a sort of informal religious radicalisation. We have also seen cases
of radicalisation in countries, such as Holland, which have done much
to accommodate Muslim immigrants (affirmative action hiring policy,
free language courses, etc.) As a matter of fact, Mohamed Bouyeri, who
murdered the filmmaker Theo Van Gogh, was born in Holland and was
collecting unemployment benefits.
These facts do not totally invalidate the relationship between failed
integration and radicalisation. But what seems unquestionable is that
the minority Muslim youth radicalisation in Europe has more to do, as
Anna Triandafyllidou argues, “with today’s global-local connections
rather than with failed integration or ethnic penalty”.
The Islamophobic construction of the Muslim “problem”
Let us reiterate an undeniable fact: since 711, Islam and Muslims have ob-
sessed and captured the European imagination, first as conquerors, then
as a competing religion and finally as the internal “Other” with the new
waves of migration. Thus, Islamophobia as a fear or a prejudiced opinion
of Islam and Muslims is not a new phenomenon; it would suffice to read
the thousands of books on “Islam and Europe” since the Islamic conquest
of the Iberian Peninsula until now. During the last centuries, we have had
polemists and historians who described Islam as the “mirror of Europe”—
it is what Europe is not (or no longer): fanatic, violent, intolerant and
misogynous. In such an essentialised image, Islam has been perceived as
a homogeneous mass, static and unresponsive to change. Edward Said,
in his book Covering Islam, has shown the intellectual fallacy of such a
postulate, as it falls in the trap of regarding Islam monolithically and
does not grasp the complex heterogeneity of a historical phenomenon.
317
Demonstrations of support to the workers of the Charlie Hebdo magazine.
What is really intriguing and somehow disturbing is that Islamophobia

is not fading in the 21st century. On the contrary, it is gaining salience.
Why? There is no consensus among intellectuals about the factors that
trigger this modern Islamophobia. Many intellectuals, both Muslims
and non-Muslims, are convinced that Islamophobia is the natural out-
come of extreme violence in Muslim countries, anti-Western terrorist
attacks, reprehensible behaviour of certain groups of migrants and the
radicalisation of some young native European Muslims.
Other intellectuals claim that the West’s disdain of Islam and Muslims
has historic roots and is ingrained in Europe’s culture of superiority.
Others go even further by arguing that there is a well-structured and
well-financed Islamophobia industry that has managed to capture pub-
lic opinion without serious contestation. In this regard, some media,
including electronic media, are pinpointed as major contributors to the
surge of Islamophobia. This argument has been brandished by John
Richardson’s book, (Mis)representing Islam: racism and British broadsheet
newspapers (2004), and by Jack Shaheen’s article, “How the media cre-
ated the Muslim Monster Myth” (Nation, July 2012).
All of these claims are debatable as they oversimplify a complex issue.
First, there is plenty of cruelty in the world, and religiously-motivated
violence has erupted in many places, not only in Islamic countries. But
318
one has to admit that Islamist violence has surpassed all other forms of
faith-based violence, not necessarily in terms of magnitude, but in terms
of the “theatrilisation” of jihadi violence through social media and the
spill-over of terrorist attacks in Europe itself (see the book published by
the Transatlantic Academy: Faith, freedom and foreign policy, NY, 2015).
The argument that Western vilification of Islam is inherent to West-
ern culture is also a gross exaggeration, as it considers the West as a
monolith incapable of empathy and trapped in its closed views of Islam
and Muslims. This is historically erroneous since many European intel-
lectuals have come to the defence of Muslims in the past and in present
times (see Edwy Plenel’s book: Pour les Musulmans, 2014) and have even
highlighted the magnificent contribution of Islam to world civilisation.
While speaking about an Islamophobic industry may suppose that
there is a sort of intellectual and political conspiracy against Islam
and Muslims, this is something I am not fond of. What is sure is that
Islamophobia is related to identity politics since it allows its adherents
to construct their identity in opposition to a negative image of Mus-
lims, their culture and religion. The permanent settlement of Muslim
migrants, or Muslims of migrant origin, in Europe has brought the
“outside inside” and has transformed Islam and Muslims into a domestic
issue and an internal threat. This change has been exacerbated by the
Iranian Fatwa attacks against the novelist Salman Rushdie, the riots in
the suburbs of France, the terrorist attacks, the cartoon controversy,
the assassination of Dutch filmmaker Theo Van Gogh and the latest
attacks against Charlie Hebdo’s cartoonists.
In a context in which European states are facing an identity crisis, an
economic slump and high rates of unemployment, all of these events
could only rekindle anti-Islamic sentiment. Europe’s Islam has become
a scapegoat and a scarecrow. It is not surprising, therefore, that Islam’s
critics among European intellectuals are becoming best sellers: Oriana
Fallaci, in Italy (La rabbia e l’orgoglio, 2001), Thilo Sarrazin, in Germany
(Deutchsland schafft sich ab, 2010), Houellebecq, in France (Soumission,
2015), Christopher Caldwell (Reflections on the revolution in Europe: immi-
gration, Islam and the West, 2009) and Bruce Bawer (While Europe slept:
how radical Islam is destroying the West from within, 2006) in England
and many others.
At the popular level, anti-Islam sentiment is also dramatically increas-
ing, as revealed by a special study on Islam by Bertelsmann Foundation
(2015). Taking Germany as a case study, the 2014 public opinion survey
319
shows the following alarming percentages: 57% of Germans believe that

Islam poses a threat; 61% are convinced that Islam is incompatible with
the West; 40% say that “because of Islam I feel as a stranger in my coun-
try”; and 24% think that Muslims should not be allowed to immigrate to
Germany. An October 2012 YOU GOV survey in England also revealed
that 49% agreed that there would be a clash of civilisations between
Muslims and native white Britons.
These percentages are quite telling. Muslim countries would be ill-ad-
vised to ignore them because they are also responsible for the degrada-
tion of the image of Islam and Muslims. They cannot simply shun their
responsibility by sidestepping the issue and suggesting that Islamo-
phobia is a sort of incurable Western illness or that Islamist terrorists
and jihadists, such as the European-native jihadists, Al-Qaeda, ISIS,
BOKO HARAM, etc., do not represent real Islam and even tarnish the
image of Islam, which is a religion of peace. This argument is politically
correct, but it is self-serving and not credible. After all, radical Islam is
the religious form through which a particular kind of violent political
rage expresses itself. It is somehow the “voice of protest” against the
states that failed to live up to their pledges, against the prevailing ac-
quiescence and anomie of Muslim societies and against the ruling elites
who harnessed religion in the service of political power.
Thus, instead of blaming the West for its hatred of Muslims, Mus-
lim countries should ask themselves this difficult question: What went
wrong in terms of political participation, economic efficiency and re-
ligious education? Why does such a destructive, nihilistic rage come
from within the Muslim community? Why do some rich Arab countries
finance and export fundamentalist movements while keeping a tight
grip on protest and dissent at home? Unless these questions are cor-
rectly addressed, it will be arduous to uproot radical ideologies, to stifle
religious violence in the name of God and, consequently, to dampen the
appeal of the Islamophobic discourse.
Counter-radicalization and de-radicalization in European policies
Since the first terrorist attacks in Europe, strategies have been de-
vised, specialised study centres have been set-up and policies have been
adopted to counter violent extremism. The array of policies includes,
among other things, the promotion of Muslim integration in European
320
countries by establishing structures for dialogue between representa-

tives of Islam and the governments. In 2003, for example, France estab-
lished the French Council of Muslim faith (Le Conseil Français du Culte
Musulman), Muslim ministers were appointed to government cabinet
positions and a new policy for the suburbs (Une nouvelle politique pour
les banlieues) was adopted, among other actions.
ANTI-ISLAM SENTIMENT IS
DRAMATICALLY INCREASING, AS REVEALED
BY A SPECIAL STUDY ON ISLAM
For decades, Germany perceived its migrants as temporary guest

workers and showed no hurry in facilitating their integration. Natural-
isation was restricted until the 1990s. But a law passed in 1999 allowed
second-generation foreigners to apply for citizenship. A 2005 Immigra-
tion law provided funding for mandatory integration courses. In 2006,
the German government inaugurated the National Conference on Islam,
and in 2007, the Federal Government adopted the First National Inte-
gration Plan, focusing on the promotion of German values of equality
and civil engagement. In July 2010, the German Interior ministry an-
nounced the launch of an exit program to provide assistance to violent
radicals seeking to turn their backs on extremism. Although Germany
escaped large-scale terrorist attacks like those of Madrid, it has not
been totally immune to terrorism. On March 2, 2011, a Muslim Kosovar
opened fire on a bus carrying US soldiers and killed two of them.
Holland took a series of measures to promote the integration of its
migrants. Already, in 1998, the government enacted the Newcomers
Integration law. Contrary to France, veils have not been prohibited, but
the use of the full veil (burka) by educators and government employees
has been banned. A Muslim-oriented broadcasting organisation was
set up in 1986. A Muslim and government contact group has been put
in place to foster dialogue. In June 2009, the government passed a
law on municipal non-discrimination services. In the same year, there
were seven Muslim members of the House of Representatives, one in
the Senate, one in the Cabinet, and the Mayor of Rotterdam was also
a Muslim. Like Germany, Holland has not been the theater of large-
scale terrorist acts, but in May 2002, Pim Fortuyn, an anti-Islamic
critic, was gunned down, and in 2004, the filmmaker Theo Van Gogh
was stabbed to death.
321
Spain has been a transit country for illegal migration and, after 1990,
became a country of final destination. Most Muslims in Spain are Mo-
roccan Arabs and Berbers who gained a living in various booming sec-
tors. Given the vicinity to Morocco, its southern neighbour and econom-
ic and fishing partner, Spain generously gave legal status to the vast
majority of illegal Moroccan immigrants. Yet, in March 2004, Spain
suffered the worst terrorist attack in Europe.
Spain’s reaction could have been harsh, but, on the contrary, the media
and government officials showed restraint, avoiding the stigmatisation
of all Muslim immigrants. In 2006, a forum for the social integration of
migrants (Foro para la integracion social de los inmigrantes) was launched,
and over the period of 2007 to 2010, a Strategic Plan for Citizenship
and Integration was adopted and was allocated $2 billion Euros for pro-
grams in education, employment, housing, social services, women and
youth. The government liaises with the Spanish Islamic Commission
(CIE), which officially represents Spain’s Muslims and which coordi-
nates two major Muslim Associations: the Spanish Federation of Islamic
Religious Groups (FEERI) and the Union of Islamic Communities. A
split in the CIE led to the formation of the Spanish Islamic Council.
Although the policies related to immigration, integration and coun-
ter-terrorism are primarily the responsibility of European states, the
EU has not remained on the side lines. In May 2004, it published a Hand-
book on Integration. In September 2005, it adopted a Common Agenda
for Integration. A Special Fund for the Integration of Third-Country
Nationals was launched in 2007, and in 2009, a European Integration
forum was established. These are only a few examples of European
states’ integration policies and the EU’s measures. Whether these pol-
icies and measures have been successful or not goes beyond the scope
of this article. What is alarming, however, is that all integration policies
did not prevent some young Muslim radicals from perpetrating horrific
violent attacks in European countries and thousands from joining the
fighting groups such as ISIS or Al-Qaeda.
Thus, the focus of states’ policies is now shifting towards de-radi-
calisation and counter-radicalisation. In 2005, the EU set the tone by
adopting a wide counter-terrorism strategy based on four types of ac-
tion: Prevent, Protect, Pursue and Respond. In the recent years, this
counter-terrorism strategy became the pillar of all European states’
policies. Grosso modo, all European states have adopted a wide array of
measures in response to terrorism and to radicalisation. These include
322
stricter security and surveillance; greater efforts to prevent radicali-

sation in prison, in Mosques or through Internet; the promotion of di-
versity training in schools; the re-assertion of the secular character of
the State; the training of local imams; and the re-insertion of returnees
from combat zones. All of these measures move in the right direction.
But they may prove insufficient if European states persist in ignoring
some disturbing facts.
The first fact is that the power of ideas has to be taken into account. Is-
lamist radicalisation is the natural offshoot of the fundamentalist ideol-
ogy that is infiltrating the social media, invading conservative mosques,
and mushrooming through generously-financed TV channels. As long as
European countries tolerate, in their midst, radical imams who preach
intolerance and hatred, accept that foreign Muslim countries continue
to finance the construction of Mosques, exert structural influence by
reinforcing close religious ties with their migrants and look to the other
side when conservative Muslim regimes crackdown on their reformists,
the fight against radicalisation may prove an uphill endeavour.
The second disturbing fact is that it is grossly misleading to assert
that only a tiny minority of Muslims back the actions of extremists and
jihadists or that groups, such as ISIS, are completely unrepresentative.
The reality speaks to the contrary. Radicals enjoy sufficient support not
only because they are perceived as an Islamist vanguard that refuses
Western dictates, but also because many Muslims still dream of re-
turning Islam to its past glory. It suffices to read some religious school
textbooks in Muslim countries to see the glorification of the Muslim
past and how the West is portrayed as a crusader, infidel or kafer (un-
believer). The European Union can use its current policies, such as the
European Neighbourhood Policy, the Union for the Mediterranean or
EU-Gulf dialogue, to tackle these delicate matters.
The third disturbing fact relates to EU policies themselves. In its deal-
ings with Mediterranean, Arab and Muslim countries, European policies
have not been coherent. Very often, commercial or strategic interests
eclipsed European values. After the democratic Palestinian elections
of 2006, the EU did not recognise the legitimacy of the Hamas victory.
After the eviction, by General Sissi of Egypt, of President Morsi, the first
democratically-elected Egyptian president, the EU reaction was shy,
at best. For decades, the EU turned a blind eye on the occupation and
colonisation of Palestine by Israel, often described in European media
as the sole democracy in the region. France and Britain took a leading
323
role in the military operations in Libya without any serious analysis, ex

ante, of the possible dramatic consequences of the regime’s implosion.
For too long, the Iraqi Shiite-dominated government has been allowed
to impose its sectarian policies without being reprimanded or punished.
The Syrian regime has been allowed to destroy its country and slaughter
its people, forcing millions to flee the country.
These few examples are only reminders that the fight against radical-
isation at home and abroad starts by asserting the power of values and
ideals in domestic and foreign policies. Communism was not defeated
by the power of arms, but by the power of ideals. By the same token,
fighting domestic radicalisation by security means only, or bombing
ISIS into surrender and submission, is a sure path of failure.
Conclusion
The vast majority of Muslims in Europe are immigrants or sons of im-

migrants, and almost half of Muslims in Denmark and Scandinavian
countries are political refugees. The bulk of the 235.000 immigrants who
have crossed the Mediterranean since January 2015 are refugees and
asylum-seekers. The number of Syrians, Iraqis, Afghans and Eritreans
among them is ample proof that human tragedies are today the main
drivers of forced migration. The European states are caught by surprise
by the magnitude of the phenomenon and somehow concerned by the
truth that the vast majority of the newcomers are Muslims who are
perceived to be inflating and swelling the European Muslim population
of 25 million, a number which already sparks fears in European societies.
The article examined the various stages of migration flows, from
temporary labour migration to permanent settlements, and showed
the gradual construction of the Muslim problem in Europe and the
emergence of far-right anti-Muslim parties. It tackled the issue of rad-
icalisation of some young European Muslims and discussed the de-rad-
icalisation policies adopted by European states. The message which
the article tried to convey is simple: Muslims are settling in Europe,
and their numbers will increase in the years to come. Given this reality,
European states should do their utmost to further their integration, and
Muslims should contribute by showing their attachment and loyalty to
their new home countries.
324
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H O M O E URO PAE US : D O ES A E URO P EA N CU LTU R E EXIST?
JULIA KRISTEVA is an author, What does it mean to feel European? Does

psychoanalyst, professor emer-
a European culture exist? This chapter will
itus at the University of Paris
Elle 7 – Diderot and a titular analyse the history, challenges and potential
member of the Paris Psychoan-
of the feeling behind this political entity de-
alytical Society. She is a Doctor
Honoris Causa of numerous fined by multilingualism, which, like a patient,
universities, Commander of the is going through real depression, losing its
Legion of Honor (2015), Com-
mander of the Order of Merit image as a great power and finding itself
(2011), first laureate of the Hol- mired in a deep financial, political and existen-
berg Prize and she was awarded
the Hannah Arendt Prize and tial crisis. Having succumbed to the dogmas of
the Vaclav Havel Prize. She identity to a criminal extent, the concept of a
is the author of thirty works,
among them: Revolution in Poetic European “us” is emerging. Given this, Europe
Language, the trilogy of Female now faces a historical challenge: Will it be able
Genius: Hannah Arendt, Mélanie
Klein and Colette, and the recent to deal with the crisis of universal belief and
story Thérèse, My Love. build bridges between religions and cultures?
326
HOMO EUROPAEUS:
DOES A EUROPEAN CULTURE EXIST?*
Is Europe KO? On the contrary:

“Without Europe, chaos would reign”. Why?
As a European citizen of French nationality, Bulgarian by birth and Amer-

ican by adoption, I am not insensitive to harsh critiques, but among them
I hear a desire to grow a European identity and culture. Despite facing a
financial crisis, the Greeks, Portuguese, Italians and even the French do
not question their belonging to a European culture; they “feel” Europe-
an. What does this sentiment—so obvious, apparently, that the Treaty
EUROPEAN CULTURE COULD

BE THE MAIN ROAD THAT LEADS
EUROPEAN NATIONS
of Rome makes no mention of it—mean? It has only recently made an

appearance on the political stage via initiatives backing European herit-
age, for example, but these lack a prospective vision. I believe European
culture could be the main road that leads European nations to a federal
Europe. However, this begs the question: What is European culture?
Which identity?
In contrast to the cult of identity,1 European culture never ceases to

unveil the paradox that identity does exist, both mine and ours, but it is
infinitely constructible and de-constructible. To the question “Who am
* T his text is largely taken from a talk given at the international symposium “Europe or
Chaos”, at the Théâtre du Rond-point des Champs Elysées, on January 28, 2013.
1 In the name of which the modern conscience, trying to clear itself, continues to wage,
even today, wars that destroy freedom.
327
I?” the best European response is not certitude but a love of the ques-
tion mark. After having succumbed to identity-focused dogmas, to the
point of criminality, a European “we” is now emerging. Although Europe
resorted to barbaric behavior in the past—something to remember and
examine always—, the fact that it has analyzed its behavior thoroughly
perhaps allows it to offer the world an understanding and practice of
identity as a questioning inquietude.
It is possible to rethink European heritage as an antidote to tensions
of identity, both ours and others. Without enumerating all the sources of
this questioning identity,2 let us remember that on-going interrogation
can turn to corrosive doubt and self-hatred: a self-destruction that Eu-
rope is far from being spared. We often reduce this heritage of identity
to a permissive tolerance of others. But tolerance is only the zero degree
of questioning; when not reduced to simply welcoming others, it invites
them to question themselves and to carry the culture of questioning and
dialogue into encounters that problematize all participants. This recipro-
cating questioning produces an endless lucidity that provides the sole con-
dition for “living together”. Identity thus understood can move us towards
a plural identity and the multilingualism of the new European citizen.
Diversity and its Languages
“Diversity is my motto”, said Jean de La Fontaine, in his “Pâté d’anguille3”.

Europe is a political entity that speaks as many languages, if not more, as
it has countries. This multilingualism is the basis of cultural diversity, and
it must be saved and respected along with national character; moreover, it
2 I hear this attitude in the words of the Jewish God: Eyeh asher eyeh (Ex 3, 14), taken up
by Jesus (Jean 8, 23) as an identity without definition, which sends the “I” to an eter-
nal return to its very being. I understand it in a different way, in the silent dialogue of
the thinking I with itself, according to Plato, which is always “two in one” and whose
thoughts don’t provide an answer but rather break down answers into questions. In Ar-
istotle’s philia politikè, he announces a social space and a political project by calling for
individual memory and personal biography. In the sense of Saint Augustin, there is only
one homeland, which is the voyage itself: In via in patria. Montaigne, in his Essais, devot-
ed to the polyphonic identity of the “I”, writes “We are all lumps, and of so various and
inform a contexture that every piece plays, every moment, its own game”. In the Cogito
by Descartes, we hear “I think therefore I am”. But what is it to think? I hear it again
in Goethe's Faust: “Ich bin der Geist der stetz verneint” (I am the spirit who always
denies). And in the endless analysis of Freud: “There where it [id] was, I must become”.
328
must be open to exchange, mixing and cross-pollination. This is a novelty

for Europeans that merits reflection.
After the horror of the Shoah, the bourgeois of the 19th century as
well as the rebels of the 20th century began to confront a new era. Now,
Europe’s linguistic diversity is creating kaleidoscopic individuals capa-
ble of challenging the bilingualism of “global” English. Is this possible?
Everything would prove the contrary. Yet, this new species is emerging
little by little: a polyphonic subject and polyglot citizen of a plurinational
Europe. Will the future European be a singular subject, with an intrin-
sically plural—trilingual, quatrilingual, multilingual—psyche? Or will
they be reduced to Globish?
More than ever, Europe's plurilinguistic space calls upon the French
to become polyglot, to explore the diversity of the world and to bring
their singularity to the understanding of Europe and the world. What
I say for the French holds true for the other twenty-eight languages of
the European polyphony. It is by making incursions into other languages
that a new passion for each language will arise (Bulgarian, Swedish,
Danish, Portuguese, etc.) This passion will not look like a shooting star,
nostalgic folklore or vestiges of academia, but rather it will function as
the index of a resurgent diversity.
Emerging from National Depression4
Whether lasting or not, the national character can experience real de-
pression, just as individuals do. Europe is losing its image as a world
power, and the financial, political and existential crises are palpa-
ble. But this has also occurred in many European nations, including
France, whose history is one of the most prominent.
When a psychoanalyst treats a depressed patient, he begins by shor-
ing up her self-confidence. In this way, a relationship is established
between the two protagonists in the cure, and spoken words become
fertile once again, enabling a critical analysis of the suffering. Similarly,
a depressed nation requires an optimal self-image before taking on,
3 Cf. “Diversité c’est ma devise” (Diversity is my motto) In Pulsions du temps, edited by J.

Kristeva, 601. Fayard, 2013.
4 Cf. “Existe-t-il une culture européenne?” (“Does a European Culture Exist?”) and “Le
message culturel français” (“The French Cultural Message”), in Pulsions du temps, edit-
ed by J. Kristeva, 601 and 635. Fayard, 2013.
329
for example, industrial expansion or a more open reception of immi-

grants. “Nations, like men, die of imperceptible impoliteness”, wrote
Giraudoux. Poorly understood universalism and colonial guilt have led
politicians and ideologues to behave with imperceptible impoliteness,
often disguised as cosmopolitism. They act with arrogant spite towards
the nation. They aggravate national depression and then infuse it with
a maniacal exaltation, both nationalistic and xenophobic.
NATIONAL CULTURAL DIVERSITY

IS THE ONLY ANTIDOTE TO THE EVIL
OF BANALITY
European nations are waiting for Europe to emerge, and Europe needs
proud and valued national cultures that offer the world the cultural
diversity that we have requested Unesco to protect. National cultural
diversity is the only antidote to the evil of banality, or this new version
of the banality of evil. A federal Europe, thus comprised, could play an
important role in the search for global balance.
Two Conceptions of Freedom
The fall of the Berlin Wall, in 1989, clearly demarcated the difference
between European culture and North-American culture. It is a question
of two conceptions of freedom played out by democracies. Different but
complementary, these two versions are equally present in international
institutions and principles, both in Europe and North America.
By identifying liberty with “self-beginning”, Kant opens the way to an
apologia of enterprising subjectivity, subordinated to the freedom of
Reason (pure or practical) and a Cause (divine or moral). In this order
of thought, favoured by Protestantism, freedom appears as the liberty
to adapt oneself to the logic of cause and effect or, to quote Hannah
Arendt, as an adaptation to or “calculation of the consequences” of the
logic of production, science or the economy. To be free is to have the
opportunity to benefit to the best of one's ability from cause and effect
in order to adapt to markets and their profits.
But another model of freedom exists, also of European stock. It ap-
pears in the Ancient Greek world, developed under the Pre-Socratics and
through Socratic dialogue. Not subordinated to a cause, this fundamental
330
freedom is deployed in the speaking being who presents and gives himself
to others, as well as to himself, and in this sense is liberated. This free-
dom of the Being of the Word, through the encounter between “One” and
“Other”, inscribes itself as an infinite question, before freedom gets roped
down into a cause and effect relationship. Poetry, desire and revolt are its
privileged experiences, revealing the incommensurable (though shareable)
singularity of each man and woman.
One can see the risks of this second model founded on the question-
ing attitude: ignoring economic reality, isolating corporatist demands,
limiting tolerance, fearing to question the demands and identity politics
of new political and social actors, not standing up to global competition
and reverting to archaic behavior and laziness. But one can also see
the advantages of this model, used by European cultures, which don't
culminate in a schema but rather in a taste for human life in its share-
able singularity.
In this context, Europe is far from being homogenous and united.
First of all, it's imperative that “Old Europe”, and France in particular,
takes the economic and existential difficulties of “New Europe”5 seri-
ously. But it is also necessary to recognize cultural differences and,
most particularly, religious differences that are tearing apart European
countries from the inside and separating them. It is urgent to learn to
respect differences (for example: Orthodox and Muslim Europe, the
persistent malaise in the Balkans, and the distress in Greece over the
financial crisis.)
The Need to Believe, the Desire to Know
Among the multiple causes of the current crisis is one that politicians
overlook: it is the denial of what I call the pre-religious, pre-political
“need to believe” inherent to speaking subjects, such as ourselves,
which expresses itself as an “ideality illness” specific to the adolescent
(whether native or of immigrant origin.)
Contrary to the curious, playful, pleasure-seeking child who wants
to know where he comes from, the adolescent is less a researcher than
a believer; he needs to believe in ideals to move beyond his parents,
separate from them and surpass himself. (I've named the adolescent a
5 A
ccording to the controversial catchphrase used by American Defense Secretary, Don-
ald Rumsfeld, during the diplomatic confrontations on the war in Iraq.
331
troubadour, romantic, revolutionary, extremist, fundamentalist, third-

world defender). But disappointment leans this malady of ideality to-
wards destruction and self-destruction, by way of exaltation: drug abuse,
anorexia, vandalism and attraction on the one hand, and to fundamen-
talist dogmas on the other. Idealism and nihilism, in the form of empty
drunkenness and martyrdom rewarded by absolute paradise, walk hand
in hand in this illness affecting adolescents, which can explode under
certain conditions in the most susceptible among them. We see its cur-
rent manifestation in the media in the cohabitation of Mafia traffic and
the djihadist exaltation raging at our doors, in Africa and Syria.
If a “malady of ideality” is shaking up our youth and, with it, the world,
can Europe possibly offer a remedy? What ideas can it volunteer? Any re-
ligious treatment of this malaise, anguish and revolt proves ineffective in
the face of the paradisiacal aspiration of this paradoxical, nihilistic belief
held by the de-socialized, disintegrated teen in the context of unforgiving
globalized migration. This rejected, indignant fanatic can also threaten
us from the inside. This is the image we have of the Jasmine Revolution,
brought about by youth avid for freedom and the recognition of its sin-
gular dignity, but that another, fanatic need to believe is snuffing out.
Europe finds itself confronted by an historic challenge. Is it able to
confront this crisis of belief which the religious lid can no longer hold
down? The terrible chaos of the tandem nihilism-fanaticism, linked to the
destruction of the capacity to think and associate, takes root in different
parts of the world and touches the very foundation of the bond between
humans. It's the idea of the human, forged at the Greek-Jewish-Christian
crossroads, with its graft of Islam, in this unsteady universality, both
singular and shareable, which seems threatened. The anguish paralyzing
Europe in these decisive times expresses doubt before these stakes. Are
we capable of mobilizing all our means—judicial, economic, educational,
therapeutic—to fight with a fine-tuned ear and the necessary training
and generosity the malady of ideality that disenfranchised adolescents
(and others), even in Europe, express so dramatically?
At the crossroads of Christianity (Catholic, Protestant, Orthodox),
Judaism and Islam, Europe is called to establish pathways between the
three monotheisms—beginning with meetings and reciprocating inter-
pretations, but also with elucidations and transvaluations inspired by the
Human Sciences. Moreover, a bastion of secularism for two centuries,
Europe is the place par excellence to elucidate a need to believe. Enlight-
enment, in its rush to combat obscurantism, underestimated its power.
332
A Culture of Women's Rights
From the time of the Enlightenment to the suffragettes, without forget-

ting the likes of Marie Curie, Rosa Luxembourg, Simone de Beauvoir
and Simone Weil, the emancipation of women through creativity and
the struggle for political, economic and social rights offers a federating
arena for national, religious and political diversity among European
citizens. This distinctive trait of European culture is also an inspira-
tion for culture and emancipation. Recently, the Simone de Beauvoir
Prize for the Liberty of Women was given to the young Pakistani Malala
Yousafzai, gravely wounded by the Taliban for having supported the
right to education for young girls on her blog.
Countering the two monsters—the political lockdown by the economy
and the threat of ecological destruction—, the European cultural space
can offer an audacious response. And perhaps it is the sole response
that takes the complexity of the human condition seriously, including
the lessons of its history and the risks of its freedom.
Am I too optimistic? To highlight the character, history, difficulties
and potentialities of European culture, let us imagine some concrete
initiatives: for example, organizing a European Forum in Paris on the
theme “European Culture Exists”, with the participation of eminent
intellectuals, artists and writers from 28 countries, representing a lin-
guistic, cultural and religious kaleidoscope. The idea would be to reflect
on history and current events in this plural and problematic ensemble,
which is the EU, and to raise questions around its originality, vulner-
ability and advantages. This Forum could lead to the creation of an
Academy or a College of European Cultures, perhaps even a Federation
of European Cultures, which would serve as a trampoline for or the
precursor of a political Federation. Multilingualism would be a major
actor in this dream.
RELATED ARTICLES:
The UK and Europe
Muslims in Europe: The Construction of a “Problem”
Russia and Europe
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THE UNSOLVED LIMITS
OF EUROPE AND THE NEW
GLOBAL POWERS
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337
T H E UN R E S O LVED LI M I TS O F E URO P E AND THE N EW GLOB A L POWER S
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339
T H E UN R E S O LVED LI M I TS O F E URO P E AND THE N EW GLOB A L POWER S
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341
TH E UK AND E UROPE
JOHN PEET is Political Editor Britain has always been a reluctant European.
of The Economist, covering no-
It only became a member in 1973, and it has
tably Britain and the European
Union. He was Europe Editor repeatedly complained: about the budget,
from 2003 to 2015. He has the agricultural policy, fisheries, the European
contributed to books including
The Frontiers of Europe and The Parliament and regulation. Why does Britain
Foreign Policy of the European have this attitude? In the early 1950s the Brit-
Union (Brookings) and, with a
colleague, Anton La Guardia, ish still considered their country to be a world
published Unhappy Union: how power with a large empire, not just a medi-
the euro crisis—and Europe—can
be fixed in May 2014. um-sized European country. This has left them
with a more transactional approach to Europe.
Membership of the European Union is seen
in cost-benefit terms. Will the referendum in
2016 settle the argument and make Britain a
more committed EU member?
342
THE UK AND EUROPE
Britain is by nature and political inclination a reluctant European. In

this respect, it is quite unlike any other member of the European Un-
ion. The original six countries (France, West Germany, Italy and the
Benelux) formed the club in the 1950s because it seemed the best way
to put behind the memory of a war that had damaged not only their
economies and societies, but also their moral fibre. Most of the coun-
tries that joined later, from the Mediterranean to Central and Eastern
Europe, similarly saw the European project as a way of escaping from
their often unhappy, recent history. Britain, however, felt that the war
had been a glorious period from which it had emerged as a winner, both
militarily and morally. In this sense, the war boosted the British belief
that they still had a global role and responsibility, as well as a large em-
pire to run. All of this meant that there was, in Britain’s eyes, no need
for any retreat to a position built around Europe alone.
BRITAIN CONSIDERS THE EU ON AN

ESSENTIALLY PRAGMATIC AND TRANSACTIONAL
BASIS, NOT AS AN IMPORTANT PART OF THEIR
IDENTITY AND AS AN UNDERPINNING OF
THEIR SECURITY, LIKE OTHER MEMBERS
These historical sentiments may have proved misguided. But they

remain important because they inform British attitudes about the Eu-
ropean Union (EU) even now. Almost all of the other member countries
see the EU in emotional terms as an important part of their identity and
often, also, as an underpinning of their security and prosperity. Britain
is different: it considers the EU on an essentially pragmatic and trans-
actional basis. If membership seems to be desirable because it boosts
trade and employment, fosters the success of British companies and
protects the interests of the financial services industry in the City of
London, then Britons will support it. But if the British people were to
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TH E UK AND E UROPE
be persuaded that these were no longer strong enough reasons to be

members of the club, they would be perfectly happy to no longer belong.
This way of thinking about Europe helps to explain two particular
oddities about Britain compared with other countries. The first was its
decision not to join the nascent European club in the 1950s. It deliber-
ately stood aside from both the European Coal and Steel Community
when it was formed, in 1951, and from the Messina conference that
agreed, in 1956, to set up the European Economic Community. By the
time the British government had belatedly decided to apply for mem-
bership, in 1961, France had acquired a president, Charles de Gaulle,
who was mistrustful of the British and virulently against the entire An-
glo-American establishment. De Gaulle vetoed two attempts by Britain
to join, which is why the country managed to get in only in 1973, after
his death.
IN 2015, BRITAIN IS THE ONLY COUNTRY

STILL HAVING A DEBATE ABOUT ITS CONTINUING
MEMBERSHIP IN THE EUROPEAN UNION
The second oddity about Britain is that today, in 2015, it should still
be having a debate about its continuing membership in the European
Union. It is true that ever since the British joined, they have complained
about various aspects of the European project: their heavy budget con-
tribution, the common agricultural policy, the common fisheries policy,
excessive red tape and regulation and the continuing drive towards ever
closer union. But other countries, like Denmark, Sweden and even some
of the newest members, have also had their complaints. Where Britain
is alone is in continuing to discuss the question of whether it might be
better off leaving the EU altogether. And that is the debate that the new
Conservative government of David Cameron has now relaunched by
promising that before the end of 2017, it will hold an in/out referendum,
asking voters if they want Britain to remain a member of the EU.
Mr Cameron has said that before such a referendum, he will rene-
gotiate certain aspects of Britain’s membership. The implicit threat
is that if he does not get most of what he wants, he will be happy to
advocate withdrawal. Yet, the reality is that all British governments,
whether Tory, Labour or coalitions, have quickly come to appreciate
that it would be better to remain full members, if only because the
alternatives to membership are unattractive, unattainable or both. So,
344
Mr Cameron is almost certain to campaign to stay regardless of what-

ever he wins from his renegotiation.
This conclusion is reinforced because what Mr Cameron has actually
asked for seems to be relatively minor. He would like to change the
rules to make clear that migrants from the rest of the European Union
cannot claim benefits, including in-work benefits, for the first four years
after they arrive in Britain. He wants some form of exemption from the
treaties’ aspiration of pursuing ever closer union among the peoples of
Europe. He seeks to give national parliaments a bigger say in policing
and occasionally blocking EU legislation. He wants a renewed com-
mitment to complete the single market in services, digital and energy.
And he hopes to secure some guarantees that, as the euro zone pursues
deeper political and economic integration, it will not discriminate in
any way against countries, like Britain, which have chosen not to join
the single currency.
Mr. Cameron has presented these proposed reforms as fundamental
changes in Britain’s relationship with the EU. In reality, they are nothing
of the sort. What he is in fact seeking is a set of measures that he has
reason to believe his European partners are prepared to accept, but
that he also hopes he can present, both to his Eurosceptic backbench-
ers and to the British people, as significant concessions, even if they
seem relatively modest. In effect, he is trying to repeat the success of
Harold Wilson, who came to power as Labour prime minister in 1974
with a promise to renegotiate the terms of Britain’s membership of the
then European Economic Community and to put the results to an in/
out referendum.
In the event, Wilson succeeded spectacularly. Before he began his
purported renegotiation, opinion polls suggested that there was a sub-
stantial majority in favour of leaving. He won almost nothing in his
renegotiation and even eschewed any treaty change. And yet, helped
by a strong cross-party consensus and the support of almost the entire
media and British business, he managed to win a two-thirds majority
for staying in the EEC in the referendum in June 1975. That settled the
issue for more than a generation. But now Mr Cameron has reopened it.
On the face of it, he seems to be in a better position than Wilson
was. Just as in 1975, his demands for change are not so significant as
to threaten the entire project, so his European colleagues can surely
agree to enough of them to allow him to proclaim victory. Unlike 1975,
moreover, most of the opinion polls have suggested that there is already
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TH E UK AND E UROPE
a majority in favour of remaining a member of the EU. It seems likely

that the Labour Party, despite having chosen a new Eurosceptic leader
in Jeremy Corbyn, will back staying in. The Liberal Democrats, several
leading newspapers and most of British business will do the same. In
these circumstances, it certainly should be possible for a politician as
skilled as Mr Cameron has shown himself to be to win his referendum.
Yet, possible is not the same as certain. Wilson, in 1975, had one huge
advantage over Mr Cameron, 40 years later: the perception that the
British economy was lagging behind the rest of Europe. Indeed, this
view had been crucial to the first application to join, lodged by the
Conservative government of Harold Macmillan, in 1961. Throughout
the 1960s and 1970s, the thinking in London was that continental Eu-
rope, especially West Germany, but also France and the Benelux trio,
was leaving Britain behind economically. In the post-war euphoria of
1945, Britain reckoned that it was the richest country in Europe. Only
15 years later did it come to realise that several continental economies
had overtaken it. By 1975, when Wilson held his in/out referendum, the
perception that Britain was the sick man of Europe had taken a deep
hold among voters. Only a year later, after all, Britain became the first
developed country to call on the International Monetary Fund for a
rescue loan.
As Mr Cameron will recognise only too well, that is all a big contrast
with today. Instead, the perception over the past 15 years has been that
a combination of Margaret Thatcher’s liberalising reforms of the 1980s
and the troubles of the euro zone since 2008 has created a situation in
which the UK economy is consistently outperforming most of the rest
of Europe. In 2015, indeed, the British economy was the fastest-grow-
ing among the G7 group of rich countries, which is one reason why Mr
Cameron’s Tories won the general election in May. As British voters
approach a referendum on whether to stay in or to leave the EU, they
will be conscious of Britain’s relative economic success. And at least
some may be vulnerable to the lure of a key message from the United
Kingdom Independence Party (UKIP): that Britain suffers from being
“shackled to a corpse” instead of engaging with more dynamic, fast-
er-growing countries across the Atlantic and in Asia.
Here is also a second reason why the “In” campaign will find it harder
to win than it was in 1975. The “Out” campaign is now both better fi-
nanced and better organised. UKIP, which won 4 million votes but only
one parliamentary seat in the May 2015 general election, has over the
346
past few years managed to energise a core of supporters who consider

leaving the European Union to be their top priority. In 1975, almost all
mainstream newspapers were in favour of staying in the EEC (the sole
exception was the communist Morning Star). This time, a number of
papers, including the Daily Express, the Daily Mail, the Daily Telegraph
and, possibly, The Sun, may be campaigning to leave. In 1975, the govern-
ment managed to paint the Out campaign as a group of eccentrics and
nationalists. This time, it will find it much harder to repeat that trick.
And there is a third big reason for Mr Cameron to worry about the
referendum: immigration. UKIP, in particular, has managed to conflate
Britain’s EU membership with the issue of its inability to keep down
UNLIKE 1975, MOST OF THE OPINION POLLS

HAVE SUGGESTED THAT THERE IS A MAJORITY IN
FAVOUR OF REMAINING A MEMBER OF THE EU
immigration, especially with the sight of hundreds of thousands of ref-

ugees from Africa, Afghanistan and Syria, who have been trying to
reach European shores. The simple proposition that UKIP advances
is that Britain cannot control its own borders and choose its own im-
migrants so long as it remains in the EU since it is bound to accept the
treaty-guaranteed right to free movement of people. Should there be
a renewed immigration or refugee scare in Europe at just the moment
when the referendum is being held, there is a risk that the vote may
turn into one about immigration, not EU membership, and that it may
then be lost.
Referendums are, in any case, risky affairs. Over the past 25 years,
there have been numerous examples of national referendums on Euro-
pean Union issues that have been lost, often unexpectedly and despite
solid campaigning on the Yes side by the entire political elite, most of
business and the mainstream media. Denmark and Ireland have both
rejected EU treaties, only to be asked to approve them in a second
vote. The Danes and Swedes have also voted against joining the euro.
And in 2005, the voters of France and the Netherlands spectacularly
rejected, by large majorities, the draft European Union constitutional
treaty (much of whose content was later included in the Lisbon treaty,
which was passed without a referendum anywhere except in Ireland,
whose voters accepted it only at a second attempt). Then, there is the
example of the Scottish referendum on independence that was held in
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TH E UK AND E UROPE
September 2014. At first, opinion polls suggested that this would be

easily won by the unionist side. But as the vote drew closer, the gap
narrowed, and in the end, the margin was much tighter than anybody
outside of Scotland had expected.
For all of these reasons, and despite the reassuring precedent from
1975, it would be a huge mistake to assume that the in/out referendum,
when it comes, will be easy for Mr Cameron to win. He will be under
fire from his own Eurosceptics and from sections of the press for fail-
ing to win big enough concessions in Brussels. There is every chance
that the world economy will be less benign in 2016 than it was in 2015.
The euro crisis remains unresolved, with a serious risk that Greece, in
particular, could again become a controversial issue. Migration will still
be a cause for public concern. And Mr Cameron’s government, like all
governments, may well be suffering from mid-term unpopularity.
Given these circumstances, how best can the government (and the
In campaign) try to win? One answer is to lay as much emphasis as it
can on the economics of EU membership. It is inherently impossible
IF BRITAIN LEAVES THE EU, THERE WOULD BE

LOWER GDP AS A RESULT OF TRADE DISRUPTION,
LOST EXPORTS AND LOST FOREIGN INVESTMENT
to prove either way what the consequences of British exit (or Brexit)
would be for the British economy, in large part because nobody can
be sure what precise arrangement Britain would make with the EU
after leaving. But most reputable studies, even from Eurosceptic think-
tanks, suggest that there would be some cost in lower GDP as a result
of trade disruption, lost exports and lost foreign investment. The only
circumstances in which economists manage to predict any gain in GDP
would be if a post-Brexit Britain were to adopt highly liberal policies
of ultra-low taxes, minimal regulation, low wages, unilateral free trade
and complete openness to immigration. None of these, most notably the
last, seem politically likely to follow a decision to leave the EU.
Yet, economics alone is unlikely to win the day against powerful coun-
terarguments. So a second option is to talk up the broader case for con-
tinuing EU membership. Opinion polls suggest that voters see advan-
tages in working with other European countries in such areas as trade
talks, climate change, counter-terrorism and even in foreign policy. The
antics of Russia’s Vladimir Putin in Ukraine have put more emphasis on
348
David Cameron at press conference after

Scottish referendum in September 2014.
the importance of the EU’s common foreign and security policy. Indeed,
right across Europe, support for the EU has risen in recent years in
part because of a perceived growing threat from the Kremlin, as well
as fears of a resurgence of violence and war across the Middle East.
The trouble with this line, however, is that it is extremely hard for a
prime minister and party, which have spent so many years denigrating
Brussels and all of its activities, to suddenly start praising the EU as a
bulwark of foreign policy in a dangerous world. There would be gasps
of disbelief were Mr Cameron to start saying that he is pleased to have
a nascent European external action service in Brussels or that he wel-
comes EU summits discussing what to do about Mr Putin. The Tories
have spent too long arguing that the North Atlantic Treaty Organisation
(NATO) is the only valid defender of European security for them now
to talk up the EU’s foreign and security policy with any credibility.
Hence, the third and most likely option for Mr Cameron, as he seeks
to win an endorsement for staying in the EU, is to play up the negative
consequences and risks associated with withdrawal. This tactic worked,
in the end, in the Scottish referendum. On the EU, as on Scotland, it
would start with an assumption that when voters are in doubt about
any issue, they will tend to prefer the status quo to any big change.
Pollsters reckon that as many as a quarter of British voters would back
withdrawal in any circumstances; a slightly smaller number would want
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TH E UK AND E UROPE
to stay no matter what. It is the remaining 50% or so of the electorate

that will be open to persuasion, and the natural tendency will be for
the largest chunk of this group to prefer that things remain as they are.
There are also some obvious risks associated with withdrawing from
the EU that the government can emphasise. Simple uncertainty is one.
Although the Lisbon treaty provides, in its article 50, for the possibility
that a member country can declare its intention to leave and then be
given two years to negotiate the terms of doing so, nobody has ever used
this provision. So nobody knows how hard it would be to negotiate a
new deal, nor how long it might take.
POLLSTERS RECKON THAT A 25% OF BRITISH

VOTERS WOULD BACK WITHDRAWAL FROM THE
EU; A SLIGHTLY SMALLER NUMBER WOULD
WANT TO STAY NO MATTER WHAT
A second grave source of uncertainty is the precise model that a

post-Brexit Britain might choose to adopt. It could seek to join the
European Economic Area, a club of non-EU members that consists of
Norway, Iceland and Liechtenstein. These three countries are required
to apply practically all of the European Union’s rules and regulations
and even to contribute heavily to its budget in order to retain full access
to the EU single market. Yet, they have no say over the legislation that
they are obliged to implement. Many Norwegians are dissatisfied with
this situation on the grounds of loss of democratic input into law making.
An alternative might be Switzerland, which is not forced to implement
European Union legislation, but in practice is expected to do so in order
to keep full access to the single market for goods. But the bilateral ar-
rangements between Switzerland and the EU are cumbersome and took
many years to negotiate, so Brussels will not want to replicate them for
Britain. Besides, the Swiss do not have full access to the single market for
services, including financial services, which is a serious potential draw-
back for the British economy, which is heavily oriented towards services.
Like the EEA countries, Switzerland also has to accept free movement of
people from the EU, an issue that is now extremely problematic as Swiss
voters in 2014 said yes to a referendum that proposed limits on migration
from the EU. At least for now, the EU is refusing to accept this proposal.
If not Norway or Switzerland, what other alternative is there? Britain
could seek a customs union like Turkey’s or a deep, comprehensive
350
free-trade agreement like that negotiated by some other applicant

countries. But in most of these cases, access to the single market for
services remains restricted, and there is still an expectation that coun-
tries will observe most or even all of the EU’s directives and regulations.
Or, Britain could simply rely on the rules of the World Trade Organ-
isation, of which both it and the European Union would be members.
But in such a case, there might be tariffs on certain British exports,
notably of cars, chemicals and foodstuffs. The odds are that this would
at minimum create much uncertainty, and it would also be likely to
divert foreign investment away from Britain.
Eurosceptics have responded to these uncertainties over alternatives
to full membership with three assertions. One, which is probably cor-
rect, is that both sides of such a significant trading relationship would
have an interest in some kind of free-trade deal. A second is that be-
cause Britain imports much more from the rest of the EU, especially
from Germany, than it exports, Britain has greater bargaining clout in
putting together such a deal. Yet, this seems implausible: the rest of the
EU is a much more important market for British exports (45% of the
total) than Britain is for the EU (10%).
The third suggestion is that Britain, the fifth or sixth-biggest economy
in the world, has special clout for negotiating favourable treatment in
Brussels. Yet, this seems overly optimistic. A big reason why countries
like Norway, Switzerland and even Turkey have managed to strike rel-
atively favourable deals with the EU was that they have all been seen
as potential members. A post-Brexit Britain, on the other hand, would
have just decided to leave. The temptation for the EU institutions and
the other 27 national governments not to be too generous to Britain
would be clear. Indeed, it might become an imperative: too kind a deal
with Britain might just mean that some other countries would choose
to follow it through the exit door.
The upshot of all of this is that Britain after Brexit might face, at best,
grave uncertainty over its future relationship with the EU, leading to
some leakage of foreign investment and possibly to some multination-
als choosing to move location. Or, at worst, it might find itself obliged
to stick to all the EU rules and regulations that Eurosceptics badly
want to avoid, with the added sting that it would lose any say over how
they are drawn up. The In campaign should certainly be able to make
something of these risks to help secure a vote to remain full members
of the EU.
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TH E UK AND E UROPE
Supporters of the “Better Together” campaign in London.
There is one more area in which negative campaigning might work:

the likely effect on Scotland. Scotland’s independence referendum in
September 2014 produced, after some last-minute wobbles, a decisive
ten-point victory for those wanting to remain in the union. Yet, it was
followed only nine months later by a massive election victory in Scot-
land for the Scottish Nationalist Party, which now has 56 of the 59 Scot-
tish seats in the Westminster parliament. At the time of the Scottish
referendum, the SNP promised that the result would settle the issue
for a generation. But the leader of the SNP, Nicola Sturgeon, has since
made clear that if British voters were to back Brexit from the European
Union, that might create new conditions for holding a fresh Scottish
referendum on independence. In short, Brexit might well mean not only
British withdrawal from the European Union, but also the break-up of
the British union, the United Kingdom, as well.
The odds in advance of a referendum campaign are that a combina-
tion of such negative factors with a Tory government, under Mr Camer-
on, which is advocating a vote to stay in the European Union, ought to
produce a clear decision by British voters to remain. But it is unlikely to
be won by as large a margin as the two-thirds majority won by Wilson in
1975. And right up until the vote itself, the outcome may remain uncer-
tain, as last-minute events, differential turnout or a host of extraneous
factors might affect the result. Were the vote to go against Mr Cameron,
352
the political fallout in Britain would be huge. It is hard to see him re-
maining as prime minister. His party might well split between pro- and
anti-Europeans. There might even be an early election in which Labour
and the Liberal Democrats could expect to do well. In short, much is
riding on the result of the EU referendum in Britain.
The question that much of the rest of Europe will be asking, howev-
er, is much simpler: will the referendum definitively settle the issue,
meaning that Britain will at last become a fully committed and active
member of the European Union, with no reservations to hold it back?
The answer to this question is, sadly, no, for two reasons.
The first is that the campaign for Britain to leave the EU is unlikely
to die just because a referendum returns a decision to stay, especially
if the margin of victory is reasonably close. UKIP, which took 4 million
votes in the May 2015 election, is not going to disappear, and neither are
the Tory party’s backbench Eurosceptics. Some will claim to have been
robbed by an unfair campaign. Others will, like the Parti Quebecois in
Canada, see one referendum loss as merely a prelude to a reinvigorated
second campaign at some future date. There seems likely always to be
a sizeable rump of British politicians who will want to get out of the EU.
THE PROBLEM IS THAT THE REFERENDUM

WILL NOT SETTLE THE ISSUE DEFINITIVELY,
AND BRITAIN WILL STILL HAVE ITS
RESERVATIONS ABOUT THE EU
The second reason is more subtle. It is that already, before and also
after any referendum result, Britain is semi-detached from so much of
what the European Union does. For many years, there was a popular
notion in Brussels that the EU was a two-speed organisation: more
enthusiastic countries would proceed more rapidly to full political and
economic integration, leaving the less enthusiastic to catch up later.
Economic and monetary union has shattered that idea. Now, there are
countries, foremost among them Britain, which seem almost certain
never to join the euro. This means that the club is no longer one of two
speeds; instead, it has turned into one of different ultimate destinations.
The notion of what is known in Brussels jargon as variable geometry
has become entrenched ever since the Maastricht treaty on economic
and monetary union was ratified in 1992. Britain and Denmark secured
opt-outs from the treaty provisions requiring countries to join a single
353
TH E UK AND E UROPE
currency. Other countries were also required to comply with the so-called
Maastricht criteria before they could join the euro. In this way, a division
of the European Union into those that are in the euro and those that
remain outside was created.
It is mirrored in a number of other, albeit less significant, areas. Sever-
al EU countries are not in NATO (Ireland, Austria, Finland and Sweden)
and so take a minimal role in European security and defence policy.
Similarly, a number of the EU members are not in the passport-free
Schengen zone (Ireland and Britain by choice, Bulgaria, Croatia and
Romania because they are not ready). Britain and Denmark have opted
out of substantial parts of the EU’s justice and home affairs policy. In
effect, the European Union has turned into a sort of Swiss cheese with
holes in it. But Britain stands out in some respects as having more
holes than cheese.
THE BRITISH WILL NOT TRY TO STOP FURTHER

POLITICAL AND ECONOMICAL INTEGRATION, BUT THEY
WILL STAND ASIDE FROM THE PROCESS
Will a Britain that votes in its referendum to remain in the EU decide

that it wants to join more fully in all of its other policies? It seems highly
unlikely. There is zero prospect of Britain joining the euro. Indeed, Mr
Cameron’s government is using much of its negotiating capital persuad-
ing euro-zone countries to accept a requirement that they must not
discriminate against non-members in discussions over the EU’s single
market. There is equally little chance of Britain signing up to Schengen.
In effect, Britain under Mr Cameron has decided to remain in a broadly
semi-detached position. The British will not try to stop the euro zone, in
particular, from becoming more integrated politically and economically.
But they will stand firmly aside from the process.
In short, even after a positive result in the EU referendum, Britain
will continue to be somewhat on the margins of the club, especially of
a more deeply integrated euro zone. It is to be hoped that Mr Camer-
on and his government will still throw themselves more actively into
normal EU business, ranging from foreign affairs to climate-change to
trade policy (a notable part of this is the current negotiations on the
Transatlantic Trade and Investment Partnership with America). But
Britain will remain what it always has been: a reluctant European.
354
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The UK and Europe
European Foreign Policy and Its Challenges in the Current Context

T H E UP S AND D OWNS O F TURK I S H GR OWTH, 2002–2015
In this chapter, we document a change in the character and quality

of Turkish economic growth, with a turning point around 2007. We link
this change to the reversal in the nature of economic institutions. This
institutional reversal, we argue, is a consequence of a turnaround in po-
litical factors. The first phase coincided with a deepening of the Turkish
democracy under the prodding and guidance of the European Union. As
Turkey-European Union relations collapsed and checks against the dom-
inance of the governing party were removed, these political dynamics
began to reverse and paved the way for the institutional slide.
DARON ACEMOGLU is Elizabeth and James MURAT ÜÇER serves as Global Source's con-
Killian Professor of Economics in the Depart- sultant in Turkey and is co-founder of Turkey
ment of Economics at the MIT. He has received a Data Monitor, as well as a senior lecturer at Koç
BA in economics at the University of York, MSc University. Formerly, he worked as an economist
in Mathematical Economics and Econometrics at the Institute of International Finance, Credit
and a PhD in Economics, both at the London Suisse, and the IMF. He was an advisor to the
School of Economics. He has received many Minister of Treasury at the Turkish Treasury
awards, including the John Bates Clark Medal in 2001 and the Governor of the Central Bank
and Honorary Doctorates from the University of of Turkey in 1997. Mr. Üçer received his BA and
Utrecht, Bosporus University, and the University PhD in Economics from Boğazici University and
of Athens. He has published four books, among Boston College. He has published several arti-
them, Economic Origins of Dictatorship and Democ- cles on the Turkish economy, including a book
racy (joint with James A. Robinson). on the 2001 crisis in this country.
356
THE UPS AND DOWNS OF TURKISH

GROWTH, 2002–2015: POLITICAL DYNA-
MICS, THE EUROPEAN UNION, AND THE
INSTITUTIONAL SLIDE*
Though EU-Turkey relations are multifaceted, in this essay we focus

on one specific aspect: the role of the EU in the improved institutional
structure of Turkey during the early 2000s—and the rapid growth that
this engendered—and its subsequent, more ominous contribution to the
unraveling of these political and economic improvements. We start with
a seldom addressed macroeconomic puzzle of Turkish growth: following
its severe financial crisis in 2001, Turkey enjoyed five years of rapid eco-
nomic growth, driven in large part by structural changes, productivity
growth, and a broadening base of economic activity, both geographically
and socially. This process stopped and reversed, however, even as the
foreign and the Turkish media touted a new Turkish model immune to
the ‘‘stop-go cycles’’ so characteristic of its economy in the 20th century.
TURKISH GROWTH IS UNDERPINNED BY

INSTITUTIONAL IMPROVEMENTS AND IS BEING
REVERSED BY A TURNAROUND IN THE VERY
SAME INSTITUTIONAL FOUNDATIONS
From about 2007 onwards, economic growth slowed significantly,

as government spending became the mainstay of the economy, and
productivity growth almost fully stagnated. Underpinning the sea
change was likely the reversal of the productivity-enhancing struc-
tural changes that had played a pivotal role in the previous five years.
Although one could label this as just another example of the stop-go
cycles, we note that it has an arguably different character. Rather than
the typical stop-go cycle, in which the growth phase is unsustainable
and heralds the inexorable contraction phase (because it plays out in
a weak institutional environment), we argue that we are witnessing
* We thank Izak, Atiyas, Ilker Domac, Soli Ozel, Martin Raiser, Dani Rodrik, and Sinan
Ulgen for very useful comments on an earlier draft. The usual caveat applies.
357
growth—underpinned by institutional improvements—being reversed

by a turnaround in the very same institutional foundations.
Why did Turkey undergo unusually rapid institutional improvements
starting in 2001? Our answer emphasizes a confluence of factors, part-
ly external and partly internal. First, the 2001 crisis forced Turkey’s
lethargic and conservative political system to accept a slew of fairly
radical structural reforms imposed by the International Monetary Fund
(IMF) and the World Bank. These reforms not only brought under con-
trol the persistently high inflation but also imposed discipline on the
budgetary process, shifted decision-making and regulatory authority
towards autonomous agencies in an effort to cultivate rule-based pol-
icy-making, and introduced transparency in the notoriously corrupt
government procurement procedures.
WE ANALYSE WHY TURKEY

UNDERWENT UNUSUALLY RAPID INSTITUTIONAL
IMPROVEMENTS STARTING IN 2001 AND WHY POSITIVE
INSTITUTIONAL CHANGES CAME TO AN END
Second, these economic reforms, after their introduction by a caretak-

er government, were overseen by the popularly elected AK party (the
Justice and Development Party), which, for all practical purposes, had
ended the Turkish military’s tutelage over politics, which had charac-
terized the Republic's entire history. Third, and most relevant for this
essay, both the economic reforms and the political changes undergirding
them received a substantial boost from the general warming of EU-Tur-
key relations and the blossoming hopes in Turkey that accession to the
EU was a real possibility if economic and political reforms continued.
We are, of course, aware that it is impossible to conclude with any
certainty whether a five-year growth spell reflects the flourishing of
an economy under new economic institutions and reforms, or the first
phase of yet another stop-go cycle. Nevertheless, not only were the
changes in economic institutions we have just described potentially
far-reaching, but several pieces of evidence we describe below bolster
the case that absent the institutional about-face, economic growth in
Turkey could have continued without morphing into the low-quality
growth observed in the post-2007 period.
Why then did these positive institutional changes come to an end,
also bringing down both the rate and quality of economic growth in
358
Turkey? Once again, several factors played a role. First, the reforms
initiated by the IMF and the World Bank gradually came to be reversed,
with Turkey’s recently institutionalized, rule-based policy framework
increasingly shifting back toward discretion. The procurement law tells
the story most sharply: more and more industries and items were de-
clared exempt from the law by the ruling AK party, removing this fairly
substantial barrier against corruption.
Second, and even more importantly, the AK party government, which
had earlier supported the economic opening, made an about-face once it
became sufficiently powerful. Gradually, the de jure and de facto control
of the ruling cadre of the AK party intensified, amplifying corruption and
arbitrary, unpredictable decision-making. Finally, the collapse of EU-ac-
cession talks played an arguably oversized role, both removing a powerful
anchor that had tied the AK party to the reform process and undermining
the support for institutional change that had grown in a fairly broad seg-
ment of the Turkish population. The turnaround in economic and political
reforms was reflected very closely in the macroeconomic picture, impact-
ing the pace and nature of economic growth from about 2007 onwards.
This causal story, which begins with a variety of internal and external
factors, including the EU, and moves to institutional changes and then
macroeconomic outcomes, is far from widely accepted. Though parts of it
have been emphasized in other writings,1 we are not aware of other works
that have formulated it in this fashion. We do not pretend that our argu-
ments conclusively establish these causal links, nor do we expect that this
story will convince those skeptical of the critical role of institutional fac-
tors in the macro economy or the experts who view this episode of Turkish
macroeconomic history as another example of the unsustainable stop-go
cycles of a structurally unhealthy, emerging economy.2 We do, nevertheless,
hope that this perspective will invite further work on this fascinating and
rather unusual episode of Turkish history and on the role that various
external and internal factors have in triggering rapid institutional reform
in emerging economies suffering from a myriad of institutional ills.
The speculative nature of our story notwithstanding, we would like to
emphasize the potential lessons it contains. First, it is a hopeful story on
the ability of emerging economies with weak institutions to reform rap-
idly and enjoy the fruits thereof. This hopeful reading is counterbalanced,
1 See, for instance, World Bank (2014).

2 For a recent statement of this view, see Rodrik (2015).
359
however, by two considerations. First, this process of rapid institutional

change was triggered by Turkey's deep financial crisis in 2001, which
left few other choices to the political elites, and second, it didn't last. All
the same, it does suggest that other countries, and Turkey in particular,
have an option to restart structural change and productivity growth if
they can overcome their admittedly gargantuan political problems.
In addition, it does suggest that the current stalemate notwithstand-
ing, the EU can again play a transformative role in Turkish institutional
and economic developments in the near future if its priorities change
once more towards enlargement or if another formula for closer en-
gagement with Turkey can be found. We also argue, in closing, that this
type of re-engagement would be not only hugely beneficial for Turkey
but also for Europe.
The rest of this essay is organized as follows. In the next section, we
provide a more detailed description of the ups and downs of the Turk-
ish economy since 2002, from a macro perspective. The following section
provides the institutional background for Turkey in the early 2000s and
how this changed, first in a positive direction and then towards a worse
institutional equilibrium. This section also provides a brief overview of the
EU-Turkey relations and how these played an essential role in both the pos-
itive and negative institutional dynamics of the last decade. The last section
concludes with a further discussion of the future of EU-Turkey relations.
Section I—The Ups and Downs of the Turkish Economy Since 2002
In this section, we contrast the period from 2002 to 2006—the five years
that followed Turkey’s devastating financial crisis of 2001—with the
subsequent macro developments in the Turkish economy. Our key point
is that this was a period of solid, inclusive, and reasonably high-quality
growth from which there is much to learn.
Basic statistics tell the story rather well. Chart 1 shows that the Turk-
ish economy grew at almost 6% per capita (per annum), its fastest per
capita growth since the 1960s. Turkey’s growth performance during this
period was notable not only because it was above the rates experienced
by most peers, barring some exceptional cases like China and India,3
3 S
ee, for instance, Table 1 in Kutlay (2015) or the broader discussion in Akat and Yazgan
(2012).
360
but also because it came with relatively high productivity growth.4 In

sharp contrast to the earlier periods of paltry total factor productivity
(TFP) growth, about half of the growth in per capita GDP during this
period stemmed from TFP growth, which increased by about 3% per
annum between 2002 and 2006.5
Chart 2 further shows that during this five-year interval, private in-
vestment rebounded sharply from a post-crisis low of 12% of GDP to
around 22%. The rebound was driven largely by investment in machin-
ery and equipment; construction investment also picked up, but by no
means dominated investment during this period. Contrary to a common
Chart 1
4 I n addition, using a “synthetic Turkey” approach, Meyersson (2015) finds that Turkey’s
GDP per capita increased at a faster rate after the AK Party came to power than before.
5 See, for instance, Ungor (2014). In their analysis of decadal TFP trends, Atiyas and
Bakis (2014) find that 2002-2011 not only outperforms all other decades in terms of TFP
growth, but it also does very well in international comparisons, with Turkey ranking
seventh among 98 countries. While much of this TFP growth was driven by the ‘‘struc-
tural’’ shift in employment from agriculture to industry and service sectors, this shift
has probably reflected broader.
361
misperception, the manufacturing sector also did reasonably well dur-

ing this period. Thanks to very strong productivity growth at around
7% per annum, the share of manufacturing in GDP in constant prices
increased from around 22% in 2001 to almost 24% in 2007.6
These developments reflected a host of structural changes. Inflation,
which had averaged around 80% in the 1990s, swiftly fell to single digits,
while public sector debt also declined sharply from a post-2001 crisis
peak of 75% of GDP to about 35%. These improvements helped pave the
way for the private-sector led boom that would follow.
Importantly for our story, there was also a major broadening of the eco-
nomic base in two senses. Through most of the Republic’s history, econom-
ic growth had been driven by growth in the major industrial cities in the
Western part of the country and spearheaded by large conglomerates in
these same cities. This began to change during the first half of the 2000s,
resulting in a convergence of living standards between the more advanced
West and the so-called “Anatolian Tiger” cities (e.g., Konya, Kayseri, and
Chart 2
6 I n current prices (nominal terms), the share of manufacturing declined from 19% to
17% during the same period, as service deflator outpaced manufacturing deflator. But
362
Gaziantep). This was, in turn, driven by firm-level productivity catch-up,

thanks to investments in physical and social infrastructure as well as im-
provements in the quality of public services in the inland regions.8
The second dimension of the broadening of the economic base may be
even more important. The extreme levels of inequality concerning in-
come and access to public services started declining, with some signs of
“shared” prosperity previously unseen in Turkey. As comprehensively
MANY PUBLIC SERVICES UNDERPINNING

THE FUTURE PRODUCTIVITY OF THE TURKISH
WORKFORCE HAVE EXPANDED
detailed in a recent World Bank report, examples of this transforma-

tion are many, but they all point to the same conclusion: poverty rates
declined, the middle class expanded, and income inequality contracted.9
For example, the headline Gini coefficient, measuring income inequal-
ity, dropped from a very high 42% in 2003 to about 38% in 2008.10 This
contraction in inequality was, in part, driven by labor income growth
at the bottom of the distribution, resulting from both wage growth and
employment expansion.11
Many public services underpinning the future productivity of the
Turkish workforce, such as education, healthcare, and infrastructure,
have expanded and become more equally distributed. There was also
a sharp improvement in basic social services, narrowing the gap be-
tween Turkey and the rest of the OECD. This was achieved through a
combination of reforms in public service delivery, significant increases
in budget allocations, and changing priorities towards service delivery
importantly, as noted, real growth in the manufacturing sector kept up with broader
growth in GDP. In addition, Rodrik (2009) notes that the composition of investment
moved toward tradeables (i.e., manufacturing) during this period.
7 Chapter 4 of World Bank (2014) documents the regional as well as firm-level conver-
gence story comprehensively. See also Hakura (2013), which includes a brief and useful
discussion on the Anatolian Tigers.
8 See Annex I as well as Chapter 7 in World Bank (2014). See also Raiser (2014) for a brief
discussion on the “inclusive” nature of Turkish growth, based on the World Bank study.
9 See World Bank Development Indicators.
10 W
orld Bank staff observes that Turkey’s experience in this sense is more akin to East
Asia and Eastern Europe than Latin America.
11 T
he World Economic Forum's Competitiveness Index also shows significant improve-
ments in Turkey's infrastructure quality, at least after its first year of availability, 2006.
363
in less-advantaged areas. Chart 3 shows a rapid catch-up of infant mor-

tality and life expectancy to OECD averages, with particularly striking
gains in rural areas and among poorer households. The gains in ed-
ucation are no less noteworthy. Chart 4 shows Turkey recording the
largest improvements within the OECD in the quality of education as
measured by OECD’s Program for International Student Assessment
(PISA) scores, with gains once again disproportionately concentrated
among poorer households and in rural areas.12
The budget allocations that have centrally contributed to these trends
have been made possible by the greater fiscal space that lower interest
expenditures created. This has enabled the share of health expendi-
tures in total government expenditures to increase by about 6 percent-
age points from 11% in 2002 to 17% in 2007, and that of education from
about 10% to almost 14%.13
Chart 3
12 O
ur estimates, based on Ministry of Development data.
13 The government spending over GDP figures are computed from national income accounts data.
364
Equally important were the changing priorities in public service

spending and delivery, which largely reflected the AK party’s political
objectives and payback to its base, comprising the less advantaged
segments of the population living either in provincial towns or poorer
neighborhoods of the major cities. Chart 5, for example, shows a strik-
ing reallocation of education spending away from the more prosperous
areas in the major cities towards rural areas in the East.
All of this did not go unnoticed by the population, particularly by the
AK party’s base. As reported by Gurkaynak and Sayek-Boke (2012), in a
poll conducted in 2008, approximately 85% of the respondents who had
voted for the AK party said they had done so “because of the economy,”
largely accounting for the party’s ongoing support from these less ad-
vantaged, more rural, and conservative demographics.
*****
Many aspects of this story began to change sharply around 2007. No-
table is the fact that this reversal in the character of macroeconomic
Chart 4
365
growth predated the global economic crisis. As chart 1 shows, average

per capita income growth decelerated to little over 3% from 2007 to
2014, markedly lower than the aforementioned 6% growth during 2002
to 2006. The chart also makes it clear that the loss in momentum start-
ed earlier than the deepening of the global economic crisis in late 2008.
The economy grew by a less impressive 4.7% in 2007, with the slowdown
continuing throughout 2008, even before the global crisis hit. Corrob-
orating this timing, chart 2 shows a deceleration in private investment
around 2007, which, except during the short-lived, post-2009 rebound,
stayed at levels lower than those reached in 2006 and 2007.
In this sense, the global economic crisis may have helped mask the
growing weaknesses in Turkey’s growth dynamics. After a sharp con-
traction in 2009 (by about 5%), growth rebounded during 2010 to 2011
to an unsustainable, near 9% per annum pace, fanned by massive mon-
etary and fiscal stimulus. The Central Bank’s policy rate was reduced
by over 10 percentage points, with the real interest rate declining to
zero-to-negative territory from the pre-crisis 7% to 8% levels. Fiscal
stimulus was also substantive, increasing government spending relative
Chart 5
366
to GDP from 13% around 2006 to near 16%, almost completely eroding
Turkey’s hitherto impressive public sector primary surplus.14 As a con-
sequence, the contribution of government spending to GDP growth rose
from about 10% from 2002 to 2006 to 25% in the later period.15
Though monetary and fiscal stimulus did bring growth back briefly
during 2010 to 2011, growth in the post-2007 period as a whole has
been markedly low-quality. Productivity growth has almost fully stalled,
while TFP growth has also come down from its highs during 2002 to
2006 and, by some estimates, is now hovering in negative territory.16
Manufacturing productivity, growing at about 1% per annum since
2007, has been lackluster as well. There has also been no repeat of the
broadening of the economic base witnessed in the early 2000s. The
Gini coefficient of inequality, for example, has edged up to 40% in 2011
from 38% in 2008.
Chart 6
14 T his contribution is calculated as the change in government consumption and invest-

ment spending as percent of change in GDP.
15 See Conference Board Total Economy Database.
16 See Akcay and Ucer (2008) for a discussion of these dynamics.
367
Perhaps one of the most important manifestations of this low-quality

growth has been the changing nature of the current account-growth
relationship. High growth was accompanied by a relatively moderate
current account deficit, mostly financing the rebound in domestic in-
vestment in the 2002 to 2006 period (as depicted in chart 2 above).
However, chart 6 indicates that the post-2007 pattern is quite different
in nature: it combines lower growth with higher current account defi-
cits and a sharply lower saving rate—and no higher investment rate as
shown in chart 2—suggesting that the higher inflows have been largely
financing higher consumption.17 The way the current account deficit has
been financed during these two periods also bolsters this interpretation,
with fairly long-term financing and foreign direct investment in the first
period, and shorter-term flows in the second.18
Section II—Turkey’s Institutional Backdrop and the EU Relations
Though causality is much harder to establish, it is noteworthy that

Turkey’s high growth episode overlapped with a period of major in-
stitutional and political changes. During this brief period of five years,
Turkey’s broader institutional setting has taken a conspicuous break
from the past, moving from extreme discretion towards a rule-based
environment, accompanied by major structural reforms. The deepening
of Turkish democracy at the time appeared potentially epochal. The
relations with the EU also experienced a hopeful turn with the decision
to start the accession negotiations in October 2005. In what follows, we
provide the broad contours of the ebb and flow of Turkish economic
institutions and then turn to political factors and the political institu-
tional dynamics undergirding the economic changes.
The consensus view among Turkey experts is that there has been a sig-
nificant break in the 2000s in terms of “delegation of the decision-mak-
ing power to relatively independent agencies, and the establishment
of rules that constrain the discretion of the executive” (Atiyas 2012).19
17 See Akcay and Ucer (2008) for a discussion of these dynamics.

18 Though some of the foreign direct investment in the early phase was linked to privati-
zation, much of it was driven by mergers and acquisitions in the private sector.
19 Prominent examples of these independent, autonomous agencies that were estab-
lished in the early 2000s include Public Procurement Authority (established in 2002),
Banking Regulatory and Supervision Agency (established in 1999 but commenced op-
368
This institutional shift from unchecked discretion of the 1990s to a more

rule-based framework has had significant effect on the implementation
of monetary and fiscal policies, the regulatory environment, and pri-
vatization practices. The key reform on the monetary policy front was
undoubtedly the greater independence granted to the Central Bank,
implemented as early as 2001. The new law defined the sole objective
of the Central Bank as achieving and maintaining price stability in a
context of first implicit and then formal inflation targeting, and it pro-
hibited direct lending to the government.
On the fiscal front, institutional overhaul was substantial as well. The
important steps here were the passing of two crucial laws—the Public
Finance and Debt Management (PFDM) Law, of 2002, and the Public
Financial Management and Control Law (PFMCL), of 2003—targeted
at breaking with the destructive fiscal legacy of the 1990s with runaway
off-budgetary expenditures, non-transparent borrowing practices, and
lack of fiscal accountability. The objective of the PFDM was to bring all
central government borrowing and guarantees under strict rules and to
impose reporting requirements on all debts and guarantees. The PFM-
CL, on the other hand, set the main framework of the fiscal management
system by establishing “principles and merits, multi-year budgeting,
budget scope, budget execution, performance management and strate-
gic planning, internal control, accounting, monitoring and reporting.”20
Finally, a Procurement Law, enacted under pressure and guidance
from the World Bank, in 2002, sought to ensure effectiveness, trans-
parency, and competitiveness in the public procurement system. The
Law replaced the notoriously politicized and corrupted State Procure-
ment Law, which had been in place since the 1980s. The changes on the
regulatory front were similar and also relied on the establishment of a
number of independent autonomous agencies (sometimes dubbed the
“European Model”) in order to strengthen rule-based decision-making
and insulate the regulators from political influence.
erations in late 2000), Energy Market Regulatory Authority (established in 2001), the
Telecommunications Authority (established in 2000 and recently renamed to ICTA),
and Tobacco, Tobacco Products and Alcoholic Beverages Market Regulation Authority
(established in 2002). The Competition Authority (established in 1994 and commenced
operations in 1997) and the Capital Markets Board (established in 1981) were affected
by these changes as well.
20 S
ee Kaya and Yilar (2011) for details, which also provide a comprehensive assessment
of the evolution of Turkey’s fiscal structure over the past two decades.
369
The bottom line is that thanks to the enactment of these compre-

hensive and best-practice laws, governmental control over public
expenditures was enhanced and Turkey’s out-of-control, off-budget
expenditures (including so-called “duty losses”) were greatly restrict-
ed.21 The early 2000s also witnessed improvements in Turkey’s broad-
er institutional environment, as can be gauged from the World Bank
governance and doing business indicators depicted in chart 7, where
Turkey shows solid progress in all key areas.
The corruption perception index compiled by Transparency Interna-
tional, depicted in chart 8, tells a similar story. There are tangible signs
of lower corruption starting in 2003 (corresponding to higher values of
the index), and Turkey’s rank improves from around the high 70s among
175 countries in 2003 to the low 50s in the late 2000s22. However, things
began to change for the worse around the time of the global crisis, with
Chart 7
21 N
onetheless, these reforms were highly incomplete; potential reforms aimed at increas-
ing overall efficiency in public administration and accountability in public expenditure
were shelved (Atiyas, 2012), and many inconsistencies and loopholes remained in fiscal
transparency and reporting (OECD, 2014).
370
the pace of deterioration accelerating during the AK party’s third term,

which began in June 2011. This has taken the form of a virtual stalling
of the structural reform efforts as well as a marked weakening in the
institutional environment.
The gutting of the aforementioned procurement law is indicative of
the de facto and de jure changes in economic institutions during this
period. In some sense, the AK party was never at ease with the new
law, seeing it from the very beginning as a major constraint on its gran-
diose investment projects (such as “15,000 kilometers of double-lane
highways”) and the funneling of state resources toward its own con-
stituencies. As the party gained confidence and control, the procure-
ment law began to be altered dramatically via various mechanisms,
including a continuously expanding set of “exceptions,” changes in the
tender rules (open vs. restricted), various advantages for domestic
bidders, and the introduction of rather high minimum monetary limits,
Chart 8
22 W
e interpret the fact that there is continued, albeit slight, improvement in Turkey's
score and rank in the late 2000s as a consequence of the backward-looking nature of
this corruption perception index.
371
below which procurement of goods and services would be exempted

from the law.23
As documented by Gurakar and Gunduz (2015) in their very com-
prehensive account, both the number and the value-share of public
procurement contracts that were left outside the transparent public
procurement practices increased substantially during the period from
2005 onwards, reaching 44% in 2011.24
One giant entity that was fully left outside the purview of the procure-
ment law, alongside public-private partnerships and defense spending,
was the State Housing Development Administration, TOKI, which is
directly attached to the Prime Minister’s Office. As reported in Ati-
yas (2012), although TOKI’s exemptions were originally limited to pro-
curement for public housing projects, in 2011 these were extended to
all construction undertaken by TOKI. Given that TOKI is now also
exempted from PFMCL or any other budgetary rules, this means that
the organization has wielded tremendous power over and a completely
free hand in the redistribution of urban land throughout the country.
Perhaps unsurprisingly, in light of these changes, chart 8 shows de-
clines both in the corruption perception index and Turkey’s rank, with
the latter sliding 11 notches to 64, in 2014 (out of 175 countries). It is
probably also not a coincidence that land and construction deals were
at the very heart of Turkey's largest corruption scandal, which broke
out in December 2013, and the then Minister of Environment and Urban
Planning was one of the four ministers implicated in the scandal.25
Setbacks can also be seen in crucial reform proposals that fully stalled.
Two proposals that had been floated during the IMF program negotiations,
23 E
U's 2014 Accession Report complained about both the state of the procurement law
and its implementation, writing: “Turkey’s public procurement legislation remains not
in line with the acquis in a number of aspects. This includes numerous derogations
and exemptions from the scope of the law. Both the classical and utilities sectors are
formally subject to the same law and procedures, thus making the legislation for the
utilities sector more restrictive than envisaged by the EU Utilities Directive. [...] There
have been various allegations of political influence on public tenders.”
24 They report that “the number of contracts awarded via open auctions fell from 100,820
in 2005 to 77,151 in 2011; the number of contracts covered by exclusions rose from 41,157
to 59,680. The share of the latter in total number of public procurement contracts
rose from 29% to 44%. Similarly, contracts covered by exclusions and direct buying
quadrupled from TL10.3 billion per annum in 2005 to 39.1 billion in 2011. In terms of
value-share in total public procurement, this indicated an increase from 34 percent in
2005 to 44 percent in 2011.”
25 For a timeline of the investigation and government’s response, see Muller (2014).
372
which were held throughout 2009 during the apex of the global crisis,
were first resisted and then shelved for good by the AK party leadership.
One of these was about creating an independent tax authority, which was
greatly needed not only to insulate tax collection activities from political
influence, but also to alter Turkey’s tax structure, which heavily relies on
indirect consumption taxes, towards direct taxes. The other proposal was
about adopting a “Fiscal Rule,” which would consolidate Turkey’s fiscal
adjustment and contain the deterioration experienced during the crisis.
Though early on promoted by Ali Babacan, the Deputy Prime Minister
and the Treasury Minister in charge of economic coordination, this also
never got off the ground.
LAND AND CONSTRUCTION DEALS WERE AT THE VERY

HEART OF TURKEY'S LARGEST CORRUPTION SCANDAL,
WHICH BROKE OUT IN DECEMBER 2013
Arguably more ominous were the aggressive attacks by the govern-

ment on autonomous agencies. As explained in Ozel (2015), after some
de facto meddling in the affairs of these agencies (e.g., in the form of
influencing the election of board members or the hiring and firing of
staff), the government took formal steps by signing two decrees to law
in 2011 that paved the way for more explicit intrusion from respective
ministries. Of these, one (Decree No. 649) explicitly stated that the re-
spective minister would have “the authority to inspect all transactions
and activities of the related, attached and affiliated agencies” (which in-
cluded the autonomous regulatory agencies), thus giving the ministers
and their staff the ability to restrict the independence of these agencies.
Around that time, the idea of independent regulatory institutions was
been dealt another blow, with Mr. Babacan, the main reform advocate
within the government, stating that “it was time for some independent
agencies to re-delegate their authority” (Ozel 2015).26
Meanwhile, the Central Bank, already eager to accommodate the ex-
cessively low interest rate policies pushed by the then Prime Minister
26 A
nother episode that showed AK party’s growing intolerance toward independent
scrutiny was witnessed around Turkey’s Court of Audits (TCA). After adopting a
best-practice law with some 5-year delay in 2010, the government attempted to curb
the Court’s powers and the Parliament’s access to proper financial reporting by way of
passing new legislation in 2012. After a repeal of the Law by the Constitutional Court,
the government pressed ahead with another draft law, which could, as stated in EU’s
373
Recep Tayyib Erdogan, came under even heavier pressure for not re-
ducing interest rates quickly enough to support growth. The whole
episode was damaging not just because of its implications for macro-
economic policy, but because it demonstrated the unwillingness of the
government to be restrained even by the most pliable organizations.
*****
We have argued that the turnaround in Turkey’s economic performance

is a reflection of the turnaround in economic policies and institutions,
including the stalling or reversals in the process of much needed struc-
tural reforms. But this only provides a proximate answer to the deeper
question of why economic policies and institutions improved in the
first phase and then went into a reversal. We argue that both the initial
improvements in economic institutions and their subsequent slide are
related to political factors.27
To put it simply, during its first five years of rule, the AK party be-
came, partly unwittingly and perhaps even unwillingly, an instrument
of deep-rooted political reform. This period witnessed the broadening
of the political base as the military tutelage in Turkish politics—prob-
ably the most important factor holding back Turkish democracy and
civil society—ended. A confluence of factors came together to make the
early 2000s a propitious time for such a fundamental transformation in
Turkish politics. Four deserve to be emphasized in particular.
First, as already noted, the AK party came to power after a basic
structure of economic reforms had been put in place following the 2001
financial crisis. This, and the inexperience of their top echelon, limited
what they could do.
Second, the AK party came to power as a representative of an increas-
ingly disenfranchised (or at least feeling disenfranchised) segment of
Turkish society: provincial, conservative businessmen; urban poor (who
were often recent migrants); and rural populations, except Kurds and
Alevis (who were always viewed suspiciously by the almost entirely Sunni
AK party leadership). These social groups, which were less Western, more
Progress Report of 2013, “[…] result in a distortion of the TCA’s mandate and its ability
to carry out independent and effective audit.” The Law is now on hold, having been
withdrawn because of objections from both within and outside the Parliament.
27 This emphasis on the role of political institutions in shaping economic policies and
institutions builds on Acemoglu and Robinson (2012).
374
religious, and more conservative, were never welcomed by the rulers of

Turkey in the 20th century, the so-called “Kemalist elites” (named after
their ideological commitment to the principles of the Republic’s founder,
Mustafa Kemal Ataturk; often defined to include the military, the bureau-
cracy and big, urban-based conglomerates; and argued to be represented
by the state’s party, the Republican People’s Party). This is not to deny
that the conservative ideology of these groups has all too often influenced
school curricula or formed the foundational rhetoric of several military
regimes, most notably the one catapulted to power by the 1980 coup.
But both traditionally, and specifically during the 1990s, these groups
felt increasingly excluded and were at one end of a culture war, with
seemingly stronger forces on the other side—a culture war summarized,
even if bombastically, by Prime Minister Recep Tayyip Erdogan’s fa-
mous statement: “In this country there is a segregation of Black Turks
and White Turks. Your brother Tayyip belongs to the Black Turks.”28
The AK party’s rise to power thus came to be seen as the enfranchise-
ment of this previously-excluded group. During their early rule, they
had to defend democracy (which they interpreted as respecting the
electoral results rather than succumbing to a military intervention
against them) as a survival strategy.
Third, the AK party came to power in 2002 with a limited mandate,
receiving only 34% of the national vote. They had little choice but rule
inclusively, especially given the suspicious and almost hostile attitude
of the military towards it from the start.
Fourth, the AK party came on the scene when EU-Turkey relations
were undergoing perhaps their most constructive period and presented
itself as a staunch supporter of EU accession. To be sure, the process
leading up to the accession negotiations, launched on October 2005, was
anything but smooth. Yet, the process started reasonably earnestly and
with significant momentum in 2006 and had the strong backing of the
Turkish public, as illustrated by chart 9.29
The view at the time was that Turkish accession to the EU could
proceed relatively rapidly, as summarized by a high-profile report: “Our
starting assumption is that it is likely that accession negotiations would
28 W hile the exact timing of this statement is a matter of debate, it first rose to promi-
nence when quoted in a New York Times interview with the newly-elected Erdogan by
Deborah Sontag in May 2003.
29 As detailed in Morelli (2013), while the EU Council agreed to a “Negotiating Frame-
work” and opened the negotiations, language of the Framework was kept deliberately
375
start during 2005, but that they would last for quite some time, with
membership materialising only around 2012-15. We therefore take a
long-term perspective and explore particular areas in which the EU
and Turkey could cooperate during the long interim negotiating period”
(Dervis et al. 2004).
The EU accession process had at least two sorts of effects on Turkish
institutions. First, on the political side, the EU shouldered a role similar
to the one that the IMF and the World Bank had played on the economic
side of the aftermath of the 2001 financial crisis, providing both pressure
for reform and a template for best-practice legislation in the areas of
civil and political rights, civilian-military relations, and judicial reform.
As part of the engagement process with the EU, a number of far-reach-
ing and difficult reforms were thus set in motion, even if many of these
were finally enacted in the late 2000s. A non-exhaustive list includes
improved property rights for non-Muslim religious foundations; the
lifting of draconian penalties against speech construed as a critique of
Turkish identity; the introduction of the ability of civilian courts to try
military personnel and the banning of the trials of civilians in military
Chart 9
376
courts; laws protecting children; improved trade union rights, including

permission for workers to become members of more than one union
simultaneously; permission for public service workers to sign collective
labor agreements, removing previous bans on political and solidarity
strikes; and permission for individuals to apply to the Constitutional
Court in cases where their freedoms of fundamental rights are violated.30
In addition, the lifting of bans against Kurdish protests and legisla-
tion allowing state-run Turkish radio and television to broadcast in
Turkish; the ending of the emergency rule over the last two of the 13
Kurdish-majority provinces; the introduction of broad civilian supervi-
sion over defense expenditures; and the removal of National Security
Council presence in the oversight of cinema, video, musical works, radio,
and television; as well as a shift in the government’s willingness to gen-
erally respects rulings by the European Court of Human Rights were
also steps long-advocated by the EU and are generally interpreted as
being a direct result of EU-Turkey engagement.31
Second, as already noted, the prospect of EU accession acted as an
anchor and a carrot to the ruling party—there were major economic
gains from closer ties with Europe. It wasn’t just the economic bene-
fits of EU accession that motivated the AK party, however. Since the
AK leaders viewed themselves under constant threat from the military,
closer ties to EU appeared as an attractive bulwark against a military
coup. Since Turks were increasingly keen on becoming part of Europe,
the cards were stacked against any moves that would alienate Turkey’s
European partners.
All of these factors would disappear or change their character by the
middle of the 2000s. The effect of the economic institutional framework
put in place after the 2001 crisis ceased to have much of a determining
role as the AK party elites and mayors found ways of circumventing
the regulations and laws or changing them, as we recounted in the case
of the procurement law, to benefit themselves or their party. The 2002
election brought the beginnings of the end of the two major center-right
parties, with their votes going almost in block to the AK party in the
loose (meaning no guarantee of eventual membership was extended). Cyprus was a

thorny issue from day one, exacerbated by Turkey’s refusal to extend Customs Union
to Greek Cyprus. This has subsequently led to EU Council blocking 8 chapters. See the
annex table for a time line of EU- Turkey relations since 2005.
30 See Hale (2011).
31 See Kirisci (2011) and Gursoy (2011).
377
2007 elections, making it a much more formidable force in electoral

politics. By 2011, the AK party commanded almost 50 percent of the
vote. More importantly, the balance between the AK party (and its base)
and the Kemalist forces changed significantly. Because these events are
important both for understanding how the center of gravity of Turkish
THE EU’S ANCHOR FOR TURKISH

INSTITUTIONAL REFORMS AND LEVERAGE OVER
TURKISH POLITICIANS CAME TO AN END IN 2010
AS THE ACCESSION PROCESS STALLED
politics shifted, and how the AK party came to define itself and under-
stand its power, it is useful to recount them in some detail.
The backdrop is the political history of Turkey in the 20th centu-
ry, which was dominated by the military and state bureaucracy. The
one-party rule imposed by Ataturk came to an end in the first semi-dem-
ocratic elections of 1950,32 creating the Democratic Party, which fash-
ioned itself as a representative of the same provincial business interests
and conservative cultural values for which the AK party later came
to speak. In 1960, the military moved against the Democratic Party
and proceeded to hang its leader, Adnan Menderes. The military then
engineered two more coups, in 1971 and 1980, and also brought down
another Islamist party in 1997 with the threat of a coup (and subsequent
action by the Constitutional Court closed the party). The generals were
already unhappy about both the AK party’s rise to power and their
increasingly marginalized role in the 2000s, when the AK party nom-
inated its number two, Abdullah Gul, for the presidency. The military
and its civilian allies were alarmed by the fact that Gul’s wife wore
a headscarf and would represent Turkey in international forums and
inhabit Ataturk’s presidential palace.
This, combined with their general unease about the political direction
of the country, made the military top brass move to threaten another
coup with a web memorandum in April 2007, following the confirmation
that Gul would be the next president of Turkey. Ominously, the Constitu-
tional Court started proceedings to close the AK party for anti-secular
32 T
he first multi-party election in 1946 was not only called early by the ruling Republi-
can People’s Party before the opposition could organize itself, but was also marred by
widespread vote-rigging (Zurcher 2004).
378
activities. But the situation was different in 2007 than it had been in 1960
or 1997. The AK party had already organized deeper social networks
within modern Turkish society and had taken control of large parts of
the bureaucracy and the increasingly heavily militarized police, while
the status of the military within Turkish society was at an all-time low.
This time, the military's threat came to nothing.33
This episode not only sidelined perhaps the most powerful opponent
of the AK party, the Kemalist generals, but also further radicalized the
AK leadership. According to some insider accounts, leading AK figures
are reported to have packed their bags during the events of April 2007,
fully expecting the military to come to power and put them in jail. Their
David and Goliath reading of Turkish history—where the victimized
“Black Turks” are stamped out by the conspiracy of Kemalist “White
Turks”—was both confirmed and embellished. They may have concluded
that they had to destroy not only the anti-AK party military elites, but
also tear down the institutional structures that they saw as supporting
these hostile groups. It is therefore natural to see the roots of the sham
Ergenekon and Sledgehammer trials that the AK party and their allies
organized against journalists, former mid-ranking soldiers, and generals,
in their increasingly urgent need to weaken and remove their enemies.34
And, finally, the EU’s anchor for Turkish institutional reforms and lever-
age over Turkish politicians came to an abrupt end around 2010 as the ac-
cession process almost completely stalled. Several factors played a role in
this. The first stumbling block was Cyprus. The collapse of the UN-spon-
sored talks on a comprehensive settlement and Turkey's unwillingness
to extend the Customs Union to Cyprus brought relations to a standstill
and caused the suspension of eight ongoing chapters in 2006. Second, the
government and, to a degree certain, segments of the population were also
resistant to many of the legal and human rights reforms. Third, there was
a backlash against Turkey in some of the key European countries, most
notably in France’s referendum and the rise of Nicholas Sarkozy, with an
explicitly anti-Turkish accession platform. Finally, these developments
33 This dynamic was greatly assisted by a symbiotic alliance between the ruling AK party
and the so-called “Gulen Movement” (named after the self-exiled preacher Fetullah
Gulen, in the Unites States), which soured in the course of various power struggles
and then acrimoniously broke up over Turkey’s historic corruption investigations in
December 2013.
34 On the Ergenekon trials, see Jenkins (2011). On the Sledgehammer case, see Rodrik (2014)
379
also started changing support for the EU within the Turkish population.
As disillusionment set in, support for EU took a tumble, falling from above
70% in 2004 to a low of 40% in 2007, as detailed in chart 9.
As enthusiasm and support for EU accession among Turks waned,
and as the AK party turned East (a process that had many causes),
Turkish institutions became increasingly unanchored, further dam-
aging Turkey-EU relations. Recent remarks by Jean-Claude Juncker,
President of the European Commission, summarize what has become a
common stance among many European policymakers and bureaucrats:
“[...] under my Presidency of the Commission [...] no further enlarge-
ment will take place over the next five years. As regards Turkey, the
country is clearly far away from EU membership. A government that
blocks twitter is certainly not ready for accession" (The Official Website
of the EC President, My Foreign Policy Objectives, April 2014).
Though these comments emphasize the Turkish bans on social media,
they are a reaction to a culmination of increasingly authoritarian pol-
icies and institutional changes adopted by the AK party as a result of
the turnaround in all of the factors that were previously pushing it to
adopt pro-democratic, pro-civil society reforms. EU's 2014 Accession
Report, for example, was alarmed by the government and the judici-
ary's response to the December 2013 corruption scandal, concluding:
The response of the government following allegations of corruption in De-
cember 2013 has given rise to serious concerns regarding the independ-
ence of the judiciary and separation of powers. The widespread reassign-
ments and dismissals of police officers, judges and prosecutors, despite the
government’s claim that these were not linked to the anti- corruption case,
have impacted on the effective functioning of the relevant institutions, and
raise questions as to the way procedures were used to formalise these.
The implications of all of these trends for the Turkish political insti-
tutions and freedoms are striking. The World Justice Project, a com-
prehensive snapshot index of a country’s legal environment, ranked
Turkey 80th among 100 countries (down from 59th previously). In press
freedoms, Turkey was labeled “not free” by the Freedom House and
was ranked 149th place among 180 countries by another independent
watchdog, Reporters Without Borders. Chart 7 above further indicates
that Turkey’s progress in terms of broader governance and reform in-
dices has come to a complete halt.
It is, of course, natural to ask why Turkish political institutions and civil
society organizations failed to defend the advances and the freedoms
380
gained in the early 2000s. The most likely answer is that these institu-
tions were not as strong as one might have hoped and that civil society
organizations did not wake up to the slide until it was too late. The weak-
ness of the institutions that were supposed to guard society against the
usurpation of power probably lies in the fact that the judiciary and state
bureaucracy in Turkey have never been independent, and their alle-
giance, which firmly lay with the military before 2000, shifted quickly
to the AK party, which exploited its power to make appointments and
promotions.
THE WEAKNESS OF THE INSTITUTIONS PROBABLY LIES

IN THE FACT THAT THE JUDICIARY AND STATE BUREAU-
CRACY IN TURKEY HAVE NEVER BEEN INDEPENDENT
The AK party also came to have a heavy, almost stifling influence on

print media and TV—not unlike the influence of the Kemalist elites in
earlier periods—as indicated by the aforementioned deterioration in
Turkey’s standing in press freedoms. It also took time for civil society
organizations, which were just finding their voice during this period, and
foreign media to recognize how the political balance was shifting in Tur-
key, partly because they were still celebrating the eclipse of the military.
Section III – Concluding Remarks and the Way Forward
In this brief essay, we have advanced several key arguments. The Turk-
ish economy’s most recent ups and downs, with a turning point around
2007, are not an exemplar of the typical stop-go cycle experienced by
many emerging economies (including Turkey itself in the past), but
rather the consequence of a first phase of structural reforms and un-
precedented (by Turkish standards) improvements in economic insti-
tutions, followed by a total about-face in a second phase, during which
all of these improvements were reversed.
The roots of the ups and downs of economic institutions is to be found
in the political dynamics of Turkey, which created a propitious envi-
ronment for a major political opening in 2002, with the governing AK
party as its unwitting agent, but then enabled the AK party to become
too powerful for the always-weak checks and balances presented by
Turkish civil society, judicial institutions, and parliamentary opposition.
381
Though several other factors, including the waning effect of World

Bank/IMF reforms and the ending of the fight between the AK party
leaders and the military, decisively in favor of the former, set in motion
the slide in Turkish political and economic institutions. EU-Turkey re-
lations arguably played the critical role. Even though both the reforms
adopted in the process of EU accession and the anchoring role of the
relations with the EU facilitated the difficult economic and political
reforms of the first phase, as relations with the EU soured subsequently,
these dynamics played in reverse.
In conclusion, we draw several lessons for the future of the Turkish in-
stitutions, Turkey-EU relations, and more broadly. The most important
lesson, which, in our view, applies both to Turkey and to other emerging
economies, is that even starting with weak institutions and political im-
balances, rapid and high-quality growth appears feasible if the political
opening for deep structural reforms and improvements in economic in-
stitutions can be found. We are fully aware that such a political opening is
far from trivial, and in the Turkish case, it may have been made feasible
only because the bastions of the old order, the military and other parts
of the Kemalist elites, were particularly weakened. In addition, many of
the traditional politicians were blemished because of incompetence and
widespread corruption during the 1990s, and a deep financial crisis left
no choice to a caretaker government and its successor, the AK party, but
to work with the IMF and the World Bank. All the same, the rapidity with
which these reforms bore fruit is a surprise to many commentators who
view them as either ineffective or slow-acting.35
Second, this episode also underscores the closely linked nature of po-
litical and economic reforms. In our account, what enabled the structur-
al and economic reforms of the first phase were the favorable political
winds of change that strengthened democracy and representation in
Turkey. But these political factors went in sharp reverse in the second
phase, and as a result, so did economic institutions. The slide of politi-
cal institutions reflected the unrestrained domination of the AK party,
enabled partly because of the inherent weakness of Turkish civil society
and judicial institutions, and partly because the AK party elites were
able to establish their unrivaled control over the judiciary and media
35 T
hough they are consistent with other findings, such as Acemoglu, Naidu, Restrepo,
and Robinson (2014), showing fairly rapid improvements in economic growth following
democratization.
382
via appointments and intimidation.

Finally, we believe there are also important lessons from this episode
for the future of EU-Turkey relations. Though these appear to have hit
bottom at the moment, there are plenty of grounds for future engage-
ment. To start with, closer trade ties that were initiated by the Customs
Union are ongoing, and “upgrading” these ties, which seems inevitable
given the developments in the global economy over the past two decades,
could be one such vehicle.36 More importantly, perhaps, once the current
European economic crisis and the mounting refugee crisis are brought
under control in the next several years, EU’s priorities may shift once
again towards enlargement. Even without a full-scale turnaround of this
sort, European leadership might find different formulas for closer en-
gagement with Turkey.37 An important reason for such engagement for
the EU is highlighted by our account: under the right type of engagement,
the EU might have significant power over Turkish institutions, capable
Chart 10
36 See Ulgen (2012), Pierini and Ulgen (2014) and Kirisci and Ekim (2015).
383
of moving them in the direction of deeper and stronger democracy under

the EU's pressure and anchor. Although this power most likely requires
a willing, or at a very least pliable, partner at the helm on the Turkish
side, internal political dynamics may yet nudge Turkish leaders towards
such a position in the near future. Our essay also suggests that such
re-engagement can generate sizable economic gains for Turkey.
But the gains are not all one-sided. This institutional power is an argu-
ment for EU engagement precisely because the EU can reap two types
of major gains from closer relations with Turkey and improvements in
Turkish institutions. The first one, though almost trite because of its
frequent emphasis in many debates, is still important: Turkey can play
a stabilizing role in the Middle East (especially in contrast to its current
complicating role in the Syrian crisis).38 With European nations, large
and small, increasingly drawn into conflicts in the broader region and
feeling their aftershocks, there is arguably a greater need for a holistic
engagement with the Middle East and North Africa. This is a strate-
gy for which a democratic Turkey, engaged with the EU, could be an
invaluable asset, not only as a partner in foreign policy, but also as an
exemplar of a successful Muslim democracy for the rest of the region.39
The second pertains to demographic benefits that Turkish membership
would grant the EU, although the short-term economic costs, and per-
haps the medium-term social costs of Turkish membership are not to be
downplayed. As chart 10 shows, Turkey has a much younger population
than Europe. As Europe grows older, the gains from integrating Turkey’s
younger population into the European economy could be substantial—
both for the labor market and for the sustainability of the ever-evolving
set of social welfare programs that are so important for Europe’s pop-
ulation—even if the demographic window of opportunity presented by
possible Turkish accession will inevitably get narrower over time.
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37 For an assessment of Turkey’s Syria policy, see Hope (2013). Stein (2015) looks at the
more recent developments.
38 A htisaari et al, (2015).
39 Ahtisaari et al. (2015).
384
385
RUSS I A AND EUROPE
ORLANDO FIGES is professor The Russians have always been uncertain

of History at Birkbeck College,
about their place in Europe. That ambiva-
University of London. He gradu-
ated from the University of Cam- lence is an important aspect of their cultural
bridge, where he was a professor
history and identity. Living on the margins
of History and a fellow of Trinity
College. He is a member of the of the continent, they have never been quite
Royal Society of Literature, a sure if their destiny is there. Are they of the
regular contributor to The New
York Review of Books and the West or of the East? Feelings of ambiva-
author of numerous books on lence and insecurity, of envy and resentment
the history of Russia, including
A People's Tragedy: The Russian towards Europe, have long defined the
Revolution, 1891-1924—which won Russian national consciousness—and
the Los Angeles Times award
as well as many others—Nata- they still do today.
sha's Dance: A Cultural History of
Russia or The Whisperers: Private
Life in Stalin's Russia (2007).
386
RUSSIA AND EUROPE
From the reign of Peter the Great and the founding of St. Petersburg (his
“window on the West”) in 1703, educated Russians looked to Europe as
their ideal of progress and enlightenment. St. Petersburg was more than
a city. It was a vast, almost utopian, project of cultural engineering to re-
construct the Russian as a European man. Everything in the new capital
was intended to compel the Russians to adopt a more European way of
life. Peter forced his noblemen to shave their “Russian” beards (a mark
of devoutness in Orthodox belief), adopt Western dress, build palaces
with classical facades, and adopt European customs and habits, including
bringing women into society. By the early nineteenth century, much of
the nobility spoke French better than they spoke Russian. French was
the language of the salon, and French loan-words made their way into
the Gallicized literary language of Russian writers such as Alexander
Pushkin (1799-1837) and Nikolai Karamzin (1766-1826) at this time.
RUSSIA’S WESTERNISTS SOUGHT

EUROPE’S APPROVAL, AND WANTED
TO BE RECOGNIZED AS EQUALS
For the Russian intelligentsia, Europe was not just a place: it was an
ideal—a region of the mind that they inhabited through their education,
their language and their general attitudes. “In Russia we existed only in
a factual sense,” recalled the writer Mikhail Saltykov-Shchedrin (1826-
89). “We went to the office, we wrote letters to our relatives, we dined
in restaurants, we conversed with each other and so on. But spiritual-
ly we were all inhabitants of France.” Russia’s Westernists identified
themselves as “European Russians”. They sought Europe’s approval,
and wanted to be recognized as equals by it. For this reason, they took
a certain pride in the achievements of the imperial state, greater and
more mighty than any other European empire, and in Petrine civiliza-
tion with its mission to lead Russia to modernity. Yet at the same time
387
RUSS I A AND EUROPE
they were painfully aware that Russia was not “Europe”—it constantly
fell short of that ideal—and perhaps could never become part of it.
When Russians travelled to Western Europe, they were aware of being
treated as inferiors. In his Letters of a Russian Traveller Karamzin man-
aged to express the insecurity that many Russians felt about their Euro-
pean identity. Everywhere he went he was reminded of Russia’s backward
image in the European mind. On the road to Königsberg, two Germans
were amazed to learn that a Russian could speak foreign languages. In
Leipzig, professors talked about the Russians as “barbarians” and could
not believe that they had writers of their own. The French were even
worse: They combined condescension towards the Russians as students
THE SLAVOPHILES HAD THEIR ROOTS IN

THE NATIONALIST REACTION TO THE SLAVISH
IMITATION OF EUROPEAN CULTURE
of their culture with contempt for them as “monkeys who know only how
to imitate.” As Karamzin travelled around Europe, it seemed to him that
the Europeans had a different way of thinking, that perhaps the Russians
had been Europeanized in only a superficial way: European values and
sensibilities had yet to penetrate the Russian’s mental world. Karamz-
in’s doubts were shared by many educated Russians as they struggled
to define their “Europeanness.” In 1836, the philosopher Petr Chaadaev
(1794-1856) despaired that the Russians were able only to imitate the
West—they were unable to internalize its essential moral principles.
In the 1850s the Russian writer, socialist philosopher and émigré in
Paris Alexander Herzen (1812-70) wrote: “Our attitude to Europe and
the Europeans is still that of provincials towards the dwellers in a cap-
ital: we are servile and apologetic, take every difference for a defect,
blush for our peculiarities and try to hide them.” This inferiority com-
plex engendered complicated feelings of envy and resentment of the
West. The two were never far apart. In every educated Russian there
was both a Westernizer and a Slavophile. If Russia could not become
an equal part of Europe there were always those who were prepared
to argue that it ought to take more pride in being different.
The Slavophiles emerged as a distinct grouping in the 1830s, when
they launched their famous public disputes with the Westernists. They
had their roots in the nationalist reaction to the slavish imitation of
European culture, as well as to the French invasion of Russia in 1812.
388
The horrors of the French Revolution led the Slavophiles to reject the
universal culture of the Enlightenment and to emphasize instead those
indigenous traditions that distinguished Russia from the West. They
looked to the virtues they discerned in the patriarchal customs of the
countryside. They idealized the common folk (narod) as the true bearer
of the national character (narodnost). As devout upholders of the Ortho-
dox ideal, they maintained that the Russian was defined by Christian sac-
rifice and humility. This was the foundation of the spiritual community
(sobornost) by which Russia—in contrast to the secular law-based states
of Western Europe—was defined. The Slavophiles were never organized,
except by the intellectual leanings of various journals and discussion
groups, mostly in Moscow, which was seen as a more Russian capital,
closer to the customs of the provinces, compared to St. Petersburg.
Slavophilism was a cultural orientation, a mode of speech and dress (in
the Russian manner), and a way of thinking about Russia in relation to
the world. One notion shared by all those who were Slavophiles in this
loose sense—and here we might count both the writers Fyodor Dosto-
evsky (1821-81) and Alexander Solzhenitsyn (1918-2008)—was a special
“Russian soul”, a uniquely Russian principle of Christian love, selfless
virtue and self-sacrifice, which made Russia different from the West
and spiritually superior to it. The West might have its Crystal Palaces,
it might be technologically more advanced than Russia, but material
progress was the seed of its own destruction because it fostered selfish
individualism, from which Russia was protected by its collective spirit
of sobornost. Here was the root of the messianic concept of Russia’s
providential mission in the world to redeem humanity. And here too
was the origin of the idea that Russia was no ordinary territorial state;
it could not be confined by geographical boundaries, but was an empire
of this mystical idea. In the famous words of the poet Fyodor Tiutchev
(1803-73), a Slavophile and militant supporter of the Pan-Slav cause:
Russia cannot be understood with the mind alone,
No ordinary yardstick can span her greatness:
Her soul is of a special kind -
In Russia, one can only believe.
Such ideas were never far away from the foreign policies of Nicholas
I (1825-55). Nicholas was a firm upholder of autocratic principles. He
389
RUSS I A AND EUROPE
established the political police, tightened censorship, tried to seal off

Russia from European notions of democracy, and sent his armies to
crush revolutionary movements in Europe. Influenced by Slavophile
ideas, he equated the defence of the Orthodox religion outside Russia’s
borders with the pursuit of Russia’s national interests. He took up the
Greek cause in the Holy Lands against the rival claims of the Catholics
for control of the Holy Places, which led him into a protracted conflict
with the French. He mobilized his armies to defend the Orthodox Slavs
under Ottoman rule in the Balkans. His aim was to keep the Turkish
Empire weak and divided and, with Russia’s mighty navy in the Crimea,
to dominate the Black Sea and its access through the Straits, which
was of great importance to the Great Powers in order to connect the
Mediterranean with the Middle East. There were dangerous policies of
armed diplomacy that would lead to the Crimean War in 1854-56.
NICHOLAS I ESTABLISHED THE POLITICAL POLICE,

TIGHTENED CENSORSHIP AND TRIED TO SEAL OFF RUS-
SIA FROM EUROPEAN NOTIONS OF DEMOCRACY
The first phase of the Crimean War was the Russian invasion of the
Turkish principalities of Moldavia and Wallachia (more or less today’s Ro-
mania) where the Russians counted on the support of the Orthodox Serbs
and the Bulgarians. As Nicolas I contemplated his decision to launch
the invasion, knowing it might bring the Western powers to intervene in
the defence of Turkey, he received a memorandum on Russia’s relations
with the European powers written by the Pan-Slav ideologist, Mikhail
Pogodin, a professor of Moscow University and founding editor of the in-
fluential journal Moskvitianin (Muscovite). Filled with grievances against
the West, the memorandum clearly struck a chord with Nicholas, who
shared Pogodin’s sense that Russia’s role as the protector of the Orthodox
had not been recognized or understood and the Great Powers treated
Russia unfairly. Nicholas especially approved of the following passage, in
which Pogodin railed against the double standards of the Western powers,
which allowed them to conquer foreign lands but forbade Russia from
defending its co-religionists abroad:
France takes Algeria from Turkey,1 and almost every year England annexes
another Indian principality: none of this disturbs the balance of power; but
1 In 1830.
390
Cossacks watching a screen featuring Vladimir Putin in Simferopol,

the capital of the Republic of Crimea, on April 2015.
when Russia occupies Moldavia and Wallachia, albeit only temporarily,

that disturbs the balance of power. France occupies Rome and stays there
several years in peacetime:2 that is nothing; but Russia only thinks of occu-
pying Constantinople, and the peace of Europe is threatened. The English
declare war on the Chinese,3 who have, it seems, offended them: no one has
a right to intervene; but Russia is obliged to ask Europe for permission if
it quarrels with its neighbour. England threatens Greece to support the
false claims of a miserable Jew and burns its fleet:4 that is a lawful action;
but Russia demands a treaty to protect millions of Christians, and that is
deemed to strengthen its position in the East at the expense of the balance
of powers. We can expect nothing from the West but blind hatred and mal-
ice, which does not understand and does not want to understand (comment
in the margin by Nicholas I: “This is the whole point”).
Having stirred the Tsar’s own grievances against Europe, Pogodin
encouraged him to act alone, according to his conscience before God,
to defend the Orthodox and promote Russia’s interests in the Balkans.
Nicholas expressed his approval:
Who are our allies in Europe (comment by Nicholas: “No one, and we don’t
need them, if we put our trust in God, unconditionally and willingly.”) Our
2 A
reference to the expeditionary force of General Oudinot in 1849-50 which attacked the anti-pa-
pal Roman Republic and brought back Pius IX to Rome. The French troops remained in Rome to
protect the Pope until 1870.
3 In the Opium Wars of 1839-42.
4 A reference to the Don Pacifico affair.
391
RUSS I A AND EUROPE
only true allies in Europe are the Slavs, our brothers in blood, language,
history, and faith, and there are ten million of them in Turkey and mil-
lions in Austria… The Turkish Slavs could provide us with over 200,000
troops—and what troops!—All this without counting the Croatians, Dal-
matians, Slovenians, etc. (comment by Nicholas: “An exaggeration: reduce
to one-tenth and it is true.”) […] By declaring war on us, the Turks have
destroyed all the old treaties defining our relations, so we can now demand
the liberation of the Slavs, and bring this about by war, as they themselves
have chosen war (comment in the margin by Nicholas: “That is right.”)
If we do not liberate the Slavs and bring them under our protection, then
our enemies, the English and the French […] will do so instead. In Serbia,
Bulgaria and Bosnia, they are already everywhere among the Slavs, featur-
ing their Western parties. If they succeed, where will we be then? (comment
in the margin by Nicholas: “Absolutely right.”)
Yes! If we fail to use this favorable opportunity, if we sacrifice the Slavs
and betray their hopes, or leave their fate to be decided by other powers,
then we will have ranged against us not only one lunatic Poland but ten of
them (which our enemies desire and are working to arrange) […] (comment
in the margin by Nicholas: “That is right.”)
At the heart of this deliberation was the conviction that if Russia did
not step in to defend its interests in the Balkans, the European powers
would do so instead; hence, a clash of interests, influence and values
between the West and Russia was unavoidable.
For the European powers the spread of Western power was synon-
ymous with liberty and liberal values, free trade, good administrative
practice, religious toleration, and so on. Western Russophobia was
central to this push-back against Russian expansionist ambitions. The
rapid territorial expansion of the Russian Empire in the eighteenth
century and the demonstration of its military might against Napoleon
had left a deep impression on the European mind. There was a frenzy
of alarmist publications—pamphlets, travelogues and political trea-
tises—about “the Russian menace” to the continent. These fears had
as much to do with the imagination of an Asiatic “other” threatening
the liberties and civilization of Europe as they had to do with any real
and present threat. The boundaries of Europe were being drawn to ex-
clude the “other” that was Russia, which emerged from these writings
as a savage power, aggressive and expansionist by nature, hostile to
the principles of liberty which culturally defined the Europeans. The
Tsar’s suppression of the Polish and Hungarian revolutions, in 1830-31
and 1848-49 respectively, reinforced this position of drawing divisions
between European freedom and Russian tyranny, eventually cementing
392
the anti-Russian European alliance (Britain, France, Piedmont-Sardin-

ia) during the Crimean War.
But from the Tsar’s point of view the European powers were behaving
hypocritically: their promotion of liberty was based on spreading free
trade, which was in their economic interests. Their defence of Turkey
was a strategy to restrain Russia, whose growth was a threat to their
own imperial ambitions in the area, not least the route to India.
Defeat in the Crimean War left the Russians with a profound resent-
ment towards the West. The peace treaty imposed by the victorious
European powers was a humiliation for Russia, which was forced to
destroy its Black Sea Fleet. No compulsory disarmament had ever been
imposed on a Great Power previously. Not even France had been dis-
armed after the Napoleonic Wars. The way Russia had been treated
was unprecedented for the Concert of Europe, which was supposed to
be based on the principle that no Great Power should be humbled by
others. However, the allies did not really believe that they were dealing
with a European power, but regarded Russia as a semi-Asiatic state.
During the negotiations at the Paris Conference, Count Walewski, the
French Foreign Minister, had asked the British delegates whether it
would not be overly humiliating for the Russians that the Western pow-
ers installed consuls in their Black Sea ports to police the demobili-
zation. Lord Cowley, the British Ambassador in Paris, insisted that it
would not be the case, pointing out that a similar condition had been
imposed on China by the Treaty of Nanking after the First Opium War.
Defeated by the West, Russia turned towards Asia following her im-
perial plans after the Crimean War. Tsar Alexander II (1855-81) was
increasingly persuaded that Russia’s destiny lay as the major European
power in Asia and that only Britain stood in its way. The climate of mu-
tual suspicion between Russia and Britain after the Crimean War deeply
influenced Russia to the extent of defining its policies in the Great Game
and its imperial rivalry with Britain for supremacy in Central Asia in
the final decades of the nineteenth century.
As a Christian civilization on the Eurasian steppe, Russia could face
west or east. From the beginning of the eighteenth century, it had looked
at Europe from the vantage point of its most eastern state. Along with
393
RUSS I A AND EUROPE
Vladímir Putin in front of an image of Tzar Nicolas II.
southern Spain, it could be said to form part of Europe’s private East

World—that “other” by which Europe was defined. However, if it faced
the East, Russia would become the most western state in Asia, the
carrier of a Christian-European civilization across eleven time zones
of the globe.
The Russian conquest of Central Asia from the 1860s encouraged
the idea that Russia’s destiny was not in Europe, as had so long been
supposed, but rather in the East. In 1881, Dostoevsky wrote:
Russia is not only in Europe but in Asia as well. We must cast aside our
servile fear that Europe will call us Asiatic barbarians and say that we are
more Asian than European. This mistaken view of ourselves as exclusively
Europeans and not Asians (and we have never ceased to be the latter) has
cost us very dearly over these two centuries, and we have paid for it by
the loss of our spiritual independence. It is hard for us to turn away from
our window on Europe; but it is a matter of our destiny... When we turn to
Asia, with our new view of her, something of the same sort may happen to
us as happened to Europe when America was discovered. For, in truth, Asia
for us is that same America which we still have not discovered. With our
push towards Asia we will have a renewed upsurge of spirit and strength...
In Europe we were hangers-on and slaves, while in Asia we shall be the
masters. In Europe we were Tatars, while in Asia we can be Europeans.
This quotation is a good illustration of the Russians’ tendency to de-

fine their relations with the East in reaction to their self-esteem and
394
status in the West. Dostoevsky was not arguing that Russia is an Asi-
atic culture; only that the Europeans thought of it as so. And likewise,
his argument that Russia should embrace the East did not mean that
it should seek to be an Asiatic force: on the contrary, that only in Asia
could it find new energy to reassert its Europeanness. The root of Dos-
toevsky’s turning to the East was the bitter resentment which he, like
many Russians, felt at the West’s betrayal of Russia’s Christian cause
in the Crimean War.
RESTORING SOVIET HISTORY

IN RUSSIA WAS AN IMPORTANT PART
OF PUTIN’S NATIONALIST AGENDA
A resentful contempt for Western values was a common Russian re-

sponse to the feeling of rejection by the West. During the nineteenth
century, the “Scythian temperament”—barbarian and rude, iconoclas-
tic and extreme, lacking the restraint and moderation of the “cultivated
European citizen”—entered the cultural lexicon as a type of “Asiatic”
Russianness that insisted on its right to be “uncivilized”. This was the
sense of Pushkin’s lines:
Now temperance is not appropriate
I want to drink like a savage Scythian.
And it was the sense in which Herzen wrote to French anarchist

Pierre-Joseph Proudhon in 1849:
But do you know, Monsieur, that you have signed a contract [with Herzen
to co-finance a newspaper] with a barbarian, and a barbarian who is all the
more incorrigible for being one not only by birth but by conviction? [...] A
true Scythian, I watch with pleasure as this old world destroys itself and
I don’t have the slightest pity for it.
The “Scythian poets”—as that loose group of writers that included

Alexander Blok (1880-1921) and Andrei Bely (1880-1934) called them-
selves—embraced this savage spirit in defiance of the West. Yet at the
same time their poetry was immersed in the European avant-garde.
They took their name from the ancient Scyths, the nomadic Irani-
an-speaking tribes that had left Central Asia in the eighth century BC
and had ruled the steppes around the Black and Caspian seas for the
following 500 years. Nineteenth-century Russian intellectuals came to
395
RUSS I A AND EUROPE
see the Scyths as a sort of mythical ancestor race of the eastern Slavs.
In the final decades of the century, archaeologists led excavations of the
Scythian kurgans, the burial mounds which are scattered throughout
southern Russia, the south-eastern steppe, Central Asia and Siberia,
in an effort to establish a cultural link between the Scyths and the
ancient Slavs.
This prehistoric realm fascinated the Scythian poets. In their imagina-
tions the Scyths were a symbol of the wild rebellious nature of primeval
Russian man. They rejoiced in the elemental spirit (stikhiia) of savage
peasant Russia, and convinced themselves that the coming revolution,
which everybody sensed in the wake of that of 1905 would sweep away
the dead weight of European civilization and establish a new culture
where man and nature, art and life, were one. Blok’s famous poem The
Scythians (1918) was a programmatic statement of this Asiatic posturing
towards the West:
You are millions, we are multitudes

And multitudes and multitudes.
Come fight! Yes, we are Scythians,
Yes, Asiatics, a slant-eyed greedy tribe.
It was not so much an ideological rejection of the West as a threaten-

ing embrace, an appeal to Europe to join the revolution of the “savage
hordes” and renew itself through a cultural synthesis of East and West:
otherwise it ran the risk of being swamped by the “multitudes”. For
centuries, argued Blok, Russia had protected a thankless Europe from
the Asiatic tribes:
Like slaves, obeying and abhorred,
We were the shield between the breeds
Of Europe and the raging Mongol horde.
But now the time had come for the “old world” of Europe to “halt
before the Sphinx”:
Yes, Russia is a Sphinx. Exulting, grieving,
And sweating blood, she cannot sate
Her eyes that gaze and gaze and gaze
At you with stone-lipped love and hate.
Russia still had what Europe had long lost—“a love that burns like
fire”—a violence that renews by laying waste. By joining the Russian
396
Revolution, the West would experience a spiritual renaissance through

peaceful reconciliation with the East.
Come to us from the horrors of war,

Come to our peaceful arms and rest.
Comrades, before it is too late,
Sheathe the old sword, may brotherhood be blest.
But if the West refused to embrace this “Russian spirit”, Russia would
unleash the Asiatic hordes against it:
Know that we will no longer be your shield
But, careless of the battle cries,
We shall look on as the battle rages
Aloof, with indurate and narrow eyes
We shall not move when the savage Hun
Despoils the corpse and leaves it bare,
Burns towns, herds the cattle in the church,
And the smell of white flesh roasting fills the air.
4
In March 1918, with German planes bombing Petrograd, as St. Petersburg

had been renamed, the Bolsheviks removed the Soviet capital to Moscow.
The move symbolized the growing separation of the Soviet Republic from
Europe. By the Treaty of Brest-Litovsk, signed that month to end the war
with the Central Powers, Russia lost most of its territories in Europe—Po-
land, Finland, the Baltic states, and Ukraine. As a European power, Russia
was reduced to a status on a par with seventeenth-century Muscovy.
In the early years of Soviet power the Bolsheviks had hopes of their
revolution spreading to the rest of the European continent. As Lenin
saw it, socialism was unsustainable in a backward peasant country such
as Russia without the revolution spreading to the more advanced in-
dustrial states. Germany was the focus of their highest hopes. It was
the home of the Marxist movement and had the most advanced labour
movement in Europe. The November 1918 Revolution was greeted with
joy by the Bolsheviks. Its workers’ and soldiers’ councils seemed to
suggest that Germany was moving on the Soviet path. But there was
no German “October”. The German socialists put their weight behind a
democratic republic by entering government and crushing Communist
uprising in January 1919. No other European state came even close to
a Moscow-aligned revolution: the post-war social and economic crises
397
RUSS I A AND EUROPE
that radicalized workers began to ease, and by 1921 it had become clear
that for the immediate future, until Europe was shaken by another war
or crisis, Soviet Russia would have to survive on its own (“socialism in
one country”).
For the next seventy years Soviet Russia was isolated from the West,
politically and culturally. There were brief spells when cultural channels
opened up—during the Second World War, for example, when Western
books and films were sent by the Allies and made available to the Sovi-
et people; or during the Khrushchev Thaw of the late 1950s and early
1960s when cultural exchanges between the Soviet Union and the West
took place. With the Soviet take-over of Eastern Europe after 1945, So-
viet citizens could also travel to the Eastern Bloc countries, from which
they received some elements of European culture in a form acceptable
to the Communist authorities. But otherwise, in general terms, they
were cut off from the universalism of the European tradition to which
Petrine Russia (1703-1917) was attached.
THE RUSSIANS HAD FREELY INTERMINGLED

WITH THE FINNO-UGRIC TRIBES, THE MONGOLIANS
AND OTHER NOMAD PEOPLES FROM THE STEPPE
Among the scattered émigrés who fled Soviet Russia after 1917 was
a group of intellectuals known as the Eurasianists. Eurasianism was
a dominant intellectual trend in all the émigré communities. Many of
the best-known Russian exiles, including the philologist Prince N. S.
Trubetskoi (1890-1938), the religious thinker Father George Florovsky
(1893-1979), the historian George Vernadsky (1887-1973) and the linguis-
tic theorist Roman Jakobson (1896-1982), were members of the group.
Eurasianism was essentially a phenomenon of the emigration insofar as
it was rooted in the sense of Russia’s betrayal by the West in 1917-21. Its
largely aristocratic followers reproached the Western powers for their
failure to defeat the Bolsheviks in the Revolution and civil war, which had
ended with the collapse of Russia as a European power and their own
expulsion from their native land. Disappointed by the West, but not yet
hopeless about a possible future for themselves in Russia, they recast
their homeland as a unique, “Turanian” culture on the Asiatic steppe.
The founding manifesto of the movement was Exodus to the East, a col-
lection of ten essays published in Sofia in 1921, in which the Eurasianists
foresaw the West’s destruction and the rise of a new civilization led
398
by Russia or Eurasia. As argued Trubetskoi, the author of the most

important essays in the collection, Russia was at root a steppeland,
Asian culture. Byzantine and European influences, which had shaped
the Russian state and its high culture, barely penetrated the lower stra-
ta of Russia’s folk culture, which had developed more through contact
with the East. For centuries, the Russians had freely intermingled with
the Finno-Ugric tribes, the Mongolians and other nomad peoples from
the steppe. They had assimilated elements of their languages, their
music, customs and religion, so that these Asiatic cultures had become
absorbed in Russia’s own historical evolution.
Such folklore had little in the way of ethnographic evidence to be sup-
ported. They were but polemic and resentful posturing against the West.
In this respect, they came from the same stable as that notion first ad-
vanced by Dostoevsky that the empire’s destiny was in Asia (where the
Russians could be Europeans) rather than in Europe (where they were
“hangers-on”). Yet because of their emotive power, Eurasianist ideas had a
strong cultural impact on the Russian emigration of the 1920s and 1930s,
when those who mourned the disappearance of their country from the
European map could find new hope for it on a Eurasian one, and these
same ideas have been revived in recent years, following the collapse of
the Soviet Union, when Russia’s place in Europe has been far from clear.
With the collapse of the Soviet regime, there were hopes that Russia
would rejoin the family of European states, where it had belonged before
1917. Western governments and their advisers believed that Russia—
perhaps more so than the Eastern European states that had emerged
from the Soviet bloc—would become “like us”: a capitalist democracy
with liberal European values and attitudes. That belief was mistaken,
for historical and cultural reasons which should by now be clear; any
hopes were dashed by what took place in Russia after 1991.
For millions of Russians, the collapse of the Soviet Union was a ca-
tastrophe. In a few months they lost everything: an economic system
that had given them security and social guarantees; an empire with a
superpower status; an ideology; and a national identity shaped by the
version of Soviet history they had learned in school. The “capitalist
system” that was introduced—with hurried privatizations at a time
of hyperinflation—resulted in the theft of state assets by corrupt oli-
399
RUSS I A AND EUROPE
garchs. The boom in criminality did not help the capitalist cause. All
this fuelled a profound resentment of the West, which was blamed for
this new system. Beyond the small intelligentsia, confined to Moscow
and St. Petersburg, the majority of Russians, in provincial Russia did
not share the liberal values of democracy (freedom of expression, re-
ligious toleration, equality for women, LGBT rights, etc.), all of which
seemed foreign to the Soviet and older Russian ways by which they had
been brought up. Russians felt these values were imposed on them by
the “victorious” West in the Cold War.
Putin expressed their hurt pride and resentment of the West. In the
first term of his Presidency, from 2000 to 2004, he had seemed to signal
an interest in closer ties to Europe, if only to create a counterweight to
American influence. He continued Boris Yeltsin’s rhetoric of a “Greater
Europe”, a community of European states, including Russia in some
form, which could act as a “strong and truly independent centre of
world politics” (i.e. independent of the U.S.), albeit without Yeltsin’s
stress on liberal democratic principles. But two things altered Putin’s
stance on Europe during 2004. First, NATO expansion into Eastern
Europe and the Baltic states aggrieved the Kremlin, which saw this as
a betrayal of NATO promises on the dissolution of the Warsaw pact not
to move into the former Soviet sphere of influence. Secondly, the Orange
Revolution in Ukraine fuelled the insecurities of the Putin government,
which saw the democratic movement as a Western (U.S.-led) offensive
against Russia’s influence in its near abroad (the Commonwealth of
Independent States). Ukraine was, and still remains, a crucial border
country in Russia’s national identity and relations with Europe. Kiev
was the birthplace of Russia’s Christian civilization. As Putin often says,
many Russians regard the Ukrainians as the same people, or family of
peoples, as themselves.
Fearful of a similar democratic movement spreading from Ukraine
into Russia, Putin buttressed his authoritarian power with a nationalist
base of popular support built on anti-Western rhetoric. The U.S. and the
E.U. were fostering democratic revolutions in countries of the former
Soviet Union to destroy Russia—which, in brief was, and still is, his view.
The regime strengthened its relations with the Church. It promoted
the ideas of Eurasianist philosophers such as Ivan Ilyin (1883-1954), a
White émigré, whose remains, on Putin's orders, were returned from
Switzerland to Russia in 2009. Eurasianist ideas began to be voiced by
Kremlin ideologists. Putin backed the idea (originally proposed by the
400
President of Kazakhstan Nursultan Nazarbayev) of creating a Eurasian

Economic Union, and in 2011 the presidents of Belarus, Kazakhstan and
Russia agreed to set a target of establishing one by 2015. Putin was de-
termined to include Ukraine in this Eurasian Union, but the Ukrainians
in Maidan were equally determined to join Europe.
Restoring Soviet history in Russia was an important part of Putin’s
nationalist agenda.
Whilst acknowledging the “mistakes” of the Stalin era, his euphemism
for the terror in which countless millions of people died or languished in
the Gulag, Putin insisted that there was no need for the Russians to dwell
on this aspect of their recent past, let alone to listen to the moralizing
lectures of foreigners about how bad their history was. They could take
pride in the achievements of the Soviet period—the industrialization of
the country, the defeat of Nazi Germany and Soviet science and technol-
ogy—which had given meaning to their lives and to the sacrifices they
had made. For millions of Russians, Putin was restoring national pride.
The constant refrain in his speeches is the need for Russia to be given
more respect, to be treated as an equal by the West. He has frequently
complained about the hypocrisy and double standards of the West,
which invades Iraq in the name of freedom but imposes sanctions on
Russia when it defends what it describes as its legitimate interests in
the Crimea. The parallels with the resentment of Nicholas I about dou-
ble standards on the eve of the “first” Crimean War are striking here.
Just as Nicholas I regarded the defence of Russia’s co-religionists in the
Balkans as his Christian duty, as the Tsar of All the Russias, so Putin
has equated the defence of Russian speakers in Crimea (and thus in
east Ukraine) with the defence of Russia’s national interests. Both men
share a mystical conception of Russia as an empire that is not defined
by territorial boundaries.
Putin admires Nicholas I for standing up against all of Europe in the
defence of Russia’s interests. Today, on his orders, a portrait of the Tsar
hangs in the antechamber of the presidential office in the Kremlin.
RELATED ARTICLES:
The UK and Europe

401
THE STRENGTH OF DISTANT TIES
THOMAS CHRISTIANSEN Europe and Asia may be geographically distant

holds a Chair in European but they have strong ties not least due to their
Institutional Politics in the De-
partment of Political Science mutual dependence on trading with one another.
at Maastricht University, The Over the past two decades, this relationship has
Netherlands, and is Director of
the University’s Brussels-based, become institutionalised in multiple ways. This
part-time PhD Programme in chapter charts the nature of inter-regional coop-
European Studies. He is Exec-
utive Editor (with Simon Duke) eration between the EU and its Asian partners,
of the Journal of European Inte- while also identifying the obstacles that both
gration, co-editor (with Sophie
Vanhoonacker) of the European sides have had to confront, and puts into the
Administration Governance book context of the internal and external challenges
series at Palgrave Macmillan and
member of the board of the Re- that the EU has confronted in recent years. It
search Committee on European also argues that despite these adverse condi-
Unification of IPSA. He has pub-
lished widely on different aspects
tions, EU-Asia relations have good foundations
of European integration. and will continue to strengthen in years to come.
402
THE STRENGTH OF DISTANT TIES:

EUROPE’S RELATIONS WITH ASIA
IN A CHANGING WORLD
Introduction
In the context of an emerging multipolar world, Europe and Asia are

two regions that play an important role in the way in which global poli-
tics are being reconfigured. Given the size and the significance of their
respective economies, as well as the importance of their mutual trade,
both the European Union and its Asian partners hold great stakes in
the international economic order, and consequently, both regions also
share a mutual interest in stability and economic growth. In recognition
of this, the EU has developed strategic partnerships with the major
powers in Asia—China, India, Japan and South Korea—and, in recent
years, has made a concerted effort to be more visible in the Asian-Pacif-
ic region, not least in response to the American “pivot” to Asia and the
prospect of the US-led Trans-Pacific Partnership Agreement bringing
together key countries around the Pacific rim.
EU, IN RECENT YEARS, HAS MADE A

CONCERTED EFFORT TO BE MORE VISIBLE IN
THE ASIAN-PACIF IC REGION, IN RESPONSE
TO THE AMERICAN “PIVOT” TO ASIA
The EU’s interest in Asia, and Asia’s interest in Europe, is largely

commercial. The EU is China’s largest trading partner, and for many
Asian economies, the EU is the most important trading partner behind
China. As a result, there is a high degree of interdependence between
the European and the Asian economies, a fact that was driven home
by the impact of the financial crisis that struck Europe much harder
than Asia. For the EU, exports to China were seen as a way out of the
economic crisis, while China and other Asian countries realised that
declining demand for their goods posed a threat to their export-orient-
ed growth model. Also, in response to these developments, there was
403
a rise of foreign direct investment flows from Asia to Europe, partially

to make use of a strategic opportunity, but in the process, they also
assisted the economic recovery in Europe.
Trade and investment are therefore key factors in shaping EU-Asia re-
lations. However, security concerns also play a greater role, particularly
in the post-Cold War/post-9/11 era in which the global security environ-
ment has become less stable. It is in this regard that the geographical
distance between Europe and Asia has some curious effects. First, given
the importance of trade for both sides, the question of securing trading
routes is a mutual concern. This is one reason why Operation Atalanta,
the EU’s anti-piracy naval force mission off the Horn of Africa, which
secures shipping traffic between Asia and Europe, has been one of the
few examples of active military cooperation between China and the EU.
Second, the geographical distance between the EU and Asia means
that neither side has a meaningful military presence in the other region.
On the one hand, this entails a lack of relevance as a security actor, but
on the other hand, it also implies that neither side perceives the other
one as a threat—something which is markedly different from the re-
lationship that China has with the United States, for example, or that
Russia has with the European Union.
EUROPE IS HISTORICALLY CLOSELY ALIGNED

TO THE UNITED STATES, WHEREAS IN ASIA, THERE
ARE DIVISIONS BETWEEN THOSE COUNTRIES THAT ARE
CLOSE US ALLIES AND OTHERS THAT HAVE A HOSTILE
RELATIONSHIP WITH WASHINGTON
EU-Asian relations rely on the benign foundations of economic inter-

dependence, without being threatened by any malign security consid-
erations. The EU and the main powers in Asia regard one another as
partners rather than rivals, and certainly not as adversaries. However,
in the context of the wider geopolitical alignments in both regions, this
relationship is more complex. Europe is historically closely aligned to
the United States, whereas in Asia, there are divisions between those
countries that are close US allies and others, particularly China, that
have a predominantly antagonistic relationship with Washington.
China, in particular, has been challenging the perceived Western
dominance of global economic governance, while the United States has
sought to reorient its diplomatic and military attention to the Pacific in
404
response to the perceived assertiveness of China—a clash of interests

that has both an economic (the formation of rival free trade agree-
ments) and a security dimension (the confrontation between China and
US allies in the South China and East China Seas). This means that the
EU’s relations with Asia have to navigate both the continuing relevance
of the North Atlantic alliance and the increasing antagonism between
the US and China.
Europe’s search for a role in East Asia has to be seen in this wider
global context. A partnership between Europe and Asia has great ben-
efits and the potential for significant global influence, but at the same,
such inter-regional cooperation faces serious limitations which prevent
both regions from effectively influencing the shape of things to come.
This is partly due to the adverse circumstances in the global context,
partly due to the complications arising from relations with other global
powers, namely the United States and Russia, and partly due to the in-
herent and fundamental differences that continue to prevent stronger
and more effective cooperation among the two regions.
At the same time, the EU’s search for a deeper relationship with Asia
comes at a difficult period in its own development, happening as it does
against the background of the significant political, economic, social and
institutional challenges that Europe has had to face in the mid-2010s,
including the momentous changes in its neighbourhood. If, in 2004,
European leaders were confident enough to sign a “Treaty establishing
a Constitution for Europe”, and in 2012, the EU was the recipient of the
Nobel Peace Prize, the atmosphere had radically transformed only a few
years later. By 2015, the EU had been gripped by crisis, distracted by
short-term problems and weakened by internal differences. For many,
Europe in the 21st century is not only a continent in decline, but also a
Union in crisis.
In order to illuminate this problematic “domestic” background to the
EU’s relations with Asia, this chapter begins with a brief account of the
state of the European Union, highlighting both its distinctive character
and its current problems. It then proceeds to discuss the institutional-
ised nature of inter-regional cooperation between EU and Asia, before
then identifying the obstacles in this relationship. The chapter closes
with an outlook of how these relations will develop in the future.
405
The Hybrid Nature of the European Union
Over the past 65 years, Europe has witnessed a unique project of re-
gional integration. The integration process, bringing together a growing
number of member states, has created a regional polity, which, over
time, has acquired substantial competences to make policies and allo-
cate resources. As a result of this process, the European Union is more
than merely a “bloc” or an alliance of 28 countries. It is defined by the
presence of a number of powerful supranational institutions acting for
the common interest of the Union, independently of the individual states.
Chief among these are the European Commission, the Union’s executive
employing some 35.000 civil servants and led by a political leadership of
28 Commissioners; the European Parliament, composed of 751 direct-
ly elected members representing the people across the continent; the
European Central Bank, empowered to autonomously set interest rates
and manage the money supply for the European single currency, the
Euro; and the Court of the European Union, which is the final arbiter in
disputes among the member states and the common institutions.
The presence of these institutions is a hallmark of the integrated Eu-
rope, as is the fact that these are involved in taking legally binding
decisions that are directly applicable to the EU. The setting-up of in-
dependent institutions and their empowerment to create binding laws
above the level of the state are fundamental departures from the kind
of inter-state relations that used to govern Europe and that are still
dominant elsewhere in the world. A quasi-constitutional framework for
decision-making, common policies across the entire range of govern-
mental activity, common external representation of the EU’s interests
through a European diplomatic service, and even joint military missions
in other parts of the globe are all testimonies to the way in which the
EU has developed a new kind of politics.
To emphasize these distinctive features of the integrated Europe is
not to deny the continuing power of the individual states. States remain
the key players in the European Union; indeed, some would argue that
they are becoming increasingly powerful as the continent is confronting
a series of challenges in the 2010s. The European Union has clearly not
replaced the states in Europe and, to some extent, can even be said to
have strengthened them, despite the fact that it provides a framework
that has transformed their relations with one another and with the
outside world. This is because the EU is hybrid, combining the novel,
406
supranational elements mentioned above with the continuation of state

power in Europe.
The EU is not, despite the image frequently portrayed in the media,
set up in opposition to the states. It is set up by the states in order to
work for them, to carry out tasks that are more efficiently done jointly
and to project their common interests more effectively towards third
countries. While this may well imply that the EU occasionally confronts
one or several member states that are at odds with a particular deci-
sion or policy, it does not mean that there is a fundamental conflict be-
tween national interests and the common European interest as pursued
through the EU’s institutional framework.
EU IS A HYBRID ORGANISM, COMBINING

THE NOVEL, SUPRANATIONAL ELEMENTS WITH
THE CONTINUATION OF STATE POWER
The result of the co-existence of nation-states and the integrated Eu-

ropean polity is, therefore, not a contradiction or a paradox, but it does
lead to tensions on a regular basis. The Union hardly ever achieves an
equilibrium between the expectations put into it and its capacity to
address a particular problem. Often, the expectations exceed what the
EU is capable of delivering, while on other occasions, it is seen as over-
reaching and doing more than member states or the public are willing
to countenance. Such imbalance has left the EU exposed in the face of
a series of crises—Eurozone, Ukraine and refugees—all of which came
to a head in the mid-2010s. In view of the potential impact that these
crises may have for EU-Asia relations, the following section will briefly
discuss the nature of these developments.
Europe—A Continent in Crisis?
In the Eurozone crisis, the EU was confronted with the limitations in its
governance structure that were caused by a highly integrated monetary
policy and a strongly decentralized fiscal policy. This meant that individ-
ual member states remained comparatively free to run up public debts
even though they were united by a single currency managed by the
European Central Bank (ECB). In the aftermath of the global financial
crisis of 2008, this situation was exacerbated through national stimulus
407
packages, which relied on further deficit-spending and pushed several

Eurozone member states to the brink of sovereign debt default. This
situation created a crisis for the EU because there were no provisions
for either centralized bail-outs or for a formal withdrawal of a member
state from the single currency, leaving the EU with no way of assisting
or sanctioning states that faced default.
The way out of the crisis required long, drawn-out negotiations among
the Eurozone members about ad hoc bail-outs of individual countries,
agreements on structural reform programmes, a series of intergovern-
mental treaties that set up new institutional arrangements to monitor
fiscal discipline and macroeconomic stability, and additional powers
given to the European institutions that supervise banks. It has been
THE EU WAS SIDELINED IN THE INTERNATIONAL

DIPLOMACY SEEKING A RESOLUTION TO THE CONFLICT
BETWEEN UKRAINE AND RUSSIA, WHICH HAS BEEN
A “STRATEGIC PARTNER” OF THE UNION
an acrimonious process that also sapped public confidence in the EU,

politicised fiscal transfers in the Eurozone and gave rise to political
parties and social movements sceptical about further integration.
The pinnacle of this crisis has been the difficulties encountered be-
tween Greece and its partners in the European Union. When two large
bail-out programmes and the corresponding structural reform pro-
grammes did not improve but rather worsened the social and economic
satiation in the country, the Greek people elected a government commit-
ted to an anti-authority platform, objecting to the conditionality and the
institutional mechanisms that were attached to the various bail-outs.
The February 2015 election of the government under Alexis Tsipras
and the rejection of the terms of bail-out programme pitched Greece
against the rest of the Eurozone; in other words, it pitted anti-austerity
beliefs against the neoliberal orthodoxy in the political mainstream. The
election also created a sense that institutional decision-making may be
different from, if not opposed to, the popular choice, and that European
technocracy is in conflict with national democracy. It also put on the
agenda, for the first time in the history of the single currency, the threat
of the exit of a member state from the Eurozone, something that was not
supposed to happen after the “irrevocable” fixing of national exchange
rates.
408
In the process, the prospect of a “GREXIT”, whether chosen by the

elected government of Greece, forced upon it by Greece’s partners in
the Eurozone unwilling to underwrite further debts, or occurring acci-
dentally, became a very real possibility during this period. A lot of time,
energy and political capital was spent on avoiding such an outcome. A
lot of decision-makers had tied their own political future to the idea that
“the Euro must not fail”, making it clear why, even after the negative
vote in the popular referendum, the Greek government ultimately ac-
cepted the terms of a further bail-out programme and still won re-elec-
tion in October 2015.
In 2015, the integrity of the Eurozone was preserved and the possible
crisis of a potential GREXIT was averted, but this does not mean that
a long-term solution to the structural problems of Greece and of the
Eurozone has been found. In fact, far-reaching reform proposals have
been made, in 2015, by EU elites about the way in which the institu-
tional framework will need to be strengthened. In addition, a series of
intergovernmental treaties will need to be brought into the framework
of EU law in order to make Eurozone governance fit for the future, but
these proposals are unlikely to be implemented any time soon.
The Ukraine crisis presented the EU with a whole host of different
challenges. Ironically, it was the Ukrainian government’s attempt to ne-
gotiate an association agreement with the EU that, when abandoned
abruptly by the then President Yanukovich, fuelled a popular rebellion,
which ushered in a new pro-Western government and led to a break with
Ukraine’s post-Soviet alliance with Russia. However, when Russia, in re-
turn, annexed Crimea and supported an anti-government insurgency in
the Donbass border regions in Eastern Ukraine, the EU had difficulty in
responding quickly and effectively to the changed circumstances. Sup-
port, including massive financial aid, for the new Ukrainian government
went hand in hand with limited sanctions against Russia—sanctions that
only became more severe after a civilian airliner originating from Am-
sterdam was brought down by a Russian missile over rebel-held territory
in Eastern Ukraine, with the loss of 298 lives, most of which were Dutch.
However, beyond economic assistance and limited sanctions, the EU
was rather sidelined in the international diplomacy seeking a resolution
to the conflict between Ukraine and Russia, which has, after all, been a
long-standing “strategic partner” of the Union. The ceasefire that was
eventually agreed between the warring parties in Minsk, in February
2015, was mediated by the leaders of France and Germany, rather than
409
the EU as a whole, demonstrating once again that in critical moments

when issues of security are at stake, the larger member states are those
that matter when dealing with third countries. Above all, at the time of
writing in mid-2015, it appears as if neither the EU, nor the West more
broadly, has found a way of dealing with the more aggressive foreign
policy of the “new Russia”, as controversies about the Russian involve-
ment in the Syrian civil war have also shown.
In response to these and other challenges facing Europe, the EU’s
High Representative Federica Mogherini launched, in 2014, a process
of reviewing the European security strategy that had originally been
devised in 2003. While it is widely acknowledged that the original se-
curity strategy is somewhat outdated, the question is whether or not it
will be possible for the EU in the current circumstances to look beyond
the problems in the immediate environment and to focus on long-term
objectives and strategic thinking.
It was the war in Syria that also contributed to the third crisis of 2015
confronting the EU, namely the arrival of hundreds of thousands of ref-
ugees in Central Europe. With the intensification of the fighting there
and diminishing hopes of a foreseeable end to the quagmire, a steady
stream of refugees left the country—many staying in refugee camps in
neighbouring countries, but an ever-larger number also crossing Tur-
key, the Aegean Sea and the Balkans to seek asylum in Germany and
other countries in Central and Northern Europe. What has undeniably
been a humanitarian crisis for the Syrian people, a logistical challenge
for the authorities in the transit and recipient countries and a source of
political contestation between pro- and anti-refugee movements across
Europe has also plunged the EU into a serious political conflict.
The refugee crisis has become an issue for the EU as a whole—as
opposed to some of its member states—because it threatens the long-es-
tablished achievement of open borders within the Schengen Zone. As
several member states sought to close their borders in response to
the arrival of large numbers of refugees, the EU was confronted with
three distinct yet related challenges: the effort of maintaining a re-
gime of open internal borders (an objective that is closely linked to
the functioning of the Single Market), the perceived need of enhanc-
ing the protection of the common external border of the EU, and the
desire by member states, such as Germany, to establish a mechanism
for sharing the burden of accepting large numbers of refugees among
the member states. Again, in its initial response to the crisis, the EU
410
ecision-making process has been found wanting, and no obvious solu-

d
tion to the conundrum was in sight at the time of writing in late 2015.
Each of these crises demonstrated that the EU, despite its long track
record of dealing with complex problems and achieving compromise
among different national positions, is facing serious limitations when
confronted with the need for rapid and unified action. These challenges
have set the scene for public and acrimonious disagreements among
national governments, provided opportunities for the mobilisation of
anti-European movements and Eurosceptic political parties, and car-
ried with them the threat of disintegration of key policies that had been
developed over the previous decades—even if the Eurozone crisis also
demonstrated that successful management of the crisis ultimately re-
quired the strengthening of the institutional framework.
FOR MANY OBSERVERS, THE OVERRIDING

IMPRESSION OF THE EU, IN THE SUMMER OF 2015,
WAS THAT OF A POLITICAL EXPERIMENT FAILING
Beyond these internal problems, all of these developments combined

to damage the EU’s reputation: images of seemingly endless crisis meet-
ings, the perception of a highly divided continent with countries and
peoples looking after themselves rather than pursuing their common
interests, and the appearance of an ineffective institutional structure
to summon the political will to act collectively. For many observers in
Europe and beyond, the overriding impression of the EU, in the summer
of 2015, was that of a political experiment failing rather than succeeding,
of a continent united in name rather than in practice and of a European
Union in crisis.
In addition to the EU’s difficulty in dealing with these challenges, it
also has had to deal with the prospect of further fragmentation. The UK
government has promised its citizens an “in/out” referendum to decide
about the future of British membership in the EU, raising the spectre
of a British exit—a “Brexit”—from the Union. While Britain has long
been recognised as an awkward partner in the EU, the first-ever with-
drawal of a member state from the EU would be a huge upheaval and
a further sign of crisis and decline. To complicate matters further, in
addition to the EU, some of its member states also faced the possibility
of disintegration, with both separatist political parties gaining ground
in important regions, such as Scotland and Catalonia.
411
However, while this image of a European Union in crisis resonates in

the light of these experiences, it is not entirely accurate. A focus on the
EU’s poor record in crisis-management neglects the significant achieve-
ments that it has made in many other, more long-term endeavours. The
European Single Market continues to function well, constituting the
largest internal market in the world. The EU also leads the world with
regard to trade and foreign direct investment, and it is in the process of
negotiating trade and investment agreements with numerous economic
partners around the globe, including the US and China. The EU has
been at the forefront of the push for a global agreement to limit CO2
emissions and combat climate change, and for a long time, it has been
the biggest donor of development aid in the world. And while the EU has
generally failed to create a zone of peace and stability in its neighbour-
hood, it has at least banished violent conflict within its own territory.
EU TRADE, INVESTMENT AND ASSOCIATION

AGREEMENTS WITH ASIA REGULARLY INCLUDE REF-
ERENCES TO GOOD GOVERNANCE, THE RULE OF LAW
AND RESPECT FOR INTERNATIONAL AGREEMENT
At its inception, the EU was a political rather than an economic

project. Its essence was the search for lasting reconciliation between
France and Germany. Market integration and the creation of supra-
national institutions were the means towards this wider goal, rather
than an end in themselves. The award of the Nobel Peace Prize to the
EU, in 2012, was a reminder of this original and underlying purpose of
the integration process—an achievement that is often forgotten in the
context of economic crisis, political turmoil and regional instability.
This necessarily brief discussion of the current state of the European
Union sketches out the foundations on which its relations with Asia
have to be conducted. It demonstrates the critical state in which the
EU finds itself in the early stages of the 21st century and the problems
it faces regardless of past achievements. It also highlights the difficulties
of prioritising a concerted effort to develop better relations with Asia,
despite the significance of that region for Europe and for global govern-
ance more generally.
412
EU-Asia Relations: Institutionalising Inter-regional Dialogue
The previous discussion has demonstrated the preoccupation in Eu-

rope with internal problems and conflicts in its neighbourhood. That
leads to a concern that these current and “domestic” challenges may
distract the EU leadership from a focus on global issues and structured
relationships with more distant partners. More specifically, these preoc-
cupations risk marginalising the development of stronger relations with
Asia, despite the efforts that have been set in motion in past decades.
Historically, the EU “came late” to Asia, given that it had long-estab-
lished relations with the United States through the North Atlantic part-
nership, with the states of Africa and the Caribbean through the Lomé
Convention, and—since the accession of Spain and Portugal in 1986—also
with Latin America. However, with the rising economic and geopolitical
importance of Asia since the 1980s, the EU has responded to the shifts
in global tectonics and, over the past 20 years, has developed closer ties
with partners in Asia. This includes both partnerships with individual
countries and multilateral arrangements with regional groupings.
One of the hallmarks of the EU’s interaction with Asia is the institu-
tionalisation of these inter-regional relations. In the context of the EU’s
bilateral “strategic partnerships” with Asian countries, such as China or
India, the partners have set up an entire dialogue architecture, covering
a wide range of issues and formalising regular contact across all levels of
the administration. At the top, the strategic partnership foresees regular
summit meetings between the political leadership of both sides. There
are also ministerial meetings, high-level committees and a large number
of working groups deliberating issues across different “pillars”—polit-
ical affairs, economic and trade issues and so-called “people-to-people
dialogues”. In the case of the EU-China strategic partnership, there are,
for example, more than 40 such dialogue venues active.
While the substance of each such partnership depends on the country
involved, there are common formats and elements. The dialogue archi-
tecture can be more or less extensive and, in some cases, goes beyond
that into legally binding agreements. Thus, the EU signed Free-Trade
Agreements with South Korea in 2011, with Singapore in 2014, and in
2013 launched negotiations with China towards the conclusion of an
Investment and Partnership Agreement.
For the EU, the purpose of this policy of institutionalising relations in
such a manner is to ensure that there is more to the partnership than
413
purely economic relations. Even though the EU’s relations with Asian
partners are, on the whole, dominated by the mutual interest both sides
have in encouraging and regulating trade—facilitating market access,
settling trade disputes and protecting intellectual property rights—, the
EU’s external relations are also driven by normative concerns. One im-
mediate corollary of that ambition towards a value-based foreign policy
is the EU’s insistence on including political elements in its agreements
and dialogues with third countries. As a result, EU trade, investment
and association agreement regularly include references to good gov-
ernance, the rule of law and respect for international agreement. For
the same reason, human rights dialogues have been set up with strate-
gic partners, providing a forum in which such issues will be discussed
between EU officials and representatives of Asian countries—even if
such “dialogues” do not necessarily consist of actual deliberations but
rather of making (dissenting) statements of principles.
Beyond its reliance on bilateral agreements, the EU has put the em-
phasis on multilateral diplomacy with Asia. It has a long track record of
cooperation with the Association of Southeast Asian Nations (ASEAN),
which is often regarded as the most far-reaching example of regional
cooperation outside Europe. ASEAN has set up a number of institutions
that are, at least superficially, in the mould of the EU, and it also has
high ambitions to develop an internal market—the ASEAN Economic
Community—that mirrors that of the EU. The EU has been support-
ing the institutions of ASEAN with financial assistance and technical
advice, and group-to-group relations between the two blocs have been
traditionally strong.
In 2007, there had been an attempt to negotiate an EU-ASEAN Free
Trade Agreement, but it faltered on the inability of ASEAN as an organi-
sation to legally commit its member states to international obligations—a
sign that there are limitations to the symmetry between institutional ca-
pacity on the two sides. On the other hand, there has been long-standing
and effective cooperation in the security area through the EU’s member-
ship in the ASEAN Regional Forum (ARF), providing opportunities for
consultation on political and security issues, for confidence-building and
for preventive diplomacy—a suitable way for the EU to become involved
in security dialogues in Asia, considering its generally weak presence in
the region in this regard.
The overarching institutional structure for Europe to relate to Asia as
a whole is the Asia-Europe Meeting (ASEM). ASEM is a fairly informal
414
Times Square shopping mall in Hong Kong
process consisting of meetings, dialogues and initiatives, which culmi-

nate in an annual summit. It is a comprehensive approach involving
more than 50 countries across both continents, including not only the
member states of the EU and ASEAN but also a large number of ad-
ditional countries in both regions. Indeed, one of the challenges for
ASEM is its popularity, with new applications for membership arriving
on a regular basis and the overall number of members making interac-
tion increasingly cumbersome (as well as creating significant adminis-
trative burdens and logistical challenges for smaller states that chair
meetings and host events). Participating members are European and
Asian representatives (heads of state and government officials), the
European Commission and the ASEAN Secretariat. At any one time,
two countries—one European, one Asian—share the chairing role, and
the hosting of summits and ministerial meetings alternates between
Europe and Asia.
Since its conception in 1996, ASEM and its concomitant activities
maintain an informal approach among its members, as the underly-
ing intention of inter-regional engagement was for Europe and Asia
to “re-discover” each other. The discussions, debates and plenary
415
s essions are primarily aimed at promoting dialogue between its mem-

bers. ASEM employs a three-pillar (political/economic/social) approach
in determining the range of topics that can come under discussion. In
the beginning of ASEM, political dialogue was the key element in the
process, but as ASEM grew in size and importance, more emphasis was
placed on developing the economic and social pillar as well.
THE CREATION OF THE ASIAN INFRASTRUCTURE

INVESTMENT BANK CONSTITUTES A BROADER CHAL-
LENGE TO WHAT CHINA REGARDS AS US-DOMINATED
INSTITUTIONS OF GLOBAL ECONOMIC GOVERNANCE,
SUCH AS THE IMF AND THE WORLD BANK
There has been occasional criticism that the ASEM approach is more
of a “talking shop” than one that actually achieves results, something
which reflects more generally the frustration seen in some quarters
about the way in which the EU engages in such institutionalised dia-
logue settings. However, that criticism ignores both the long-term ob-
jectives of the EU in engaging with (groups of) third countries as well
as the nature of such diplomacy, which is more about building trust and
raising awareness than being goal-oriented.
While many of these initiatives for institutional cooperation have
come either from Europe or from Southeast Asia, China has also been
active in terms of institution-building. A prime example of this trend
is the creation of the Asian Infrastructure Investment Bank (AIIB).
Ostensibly set up to support its economic expansion through initi-
atives, such as “One Belt, One Road” or the “New Silk Road”, with
funding for infrastructure projects, the AIIB also constitutes a broad-
er challenge to what China regards as US-dominated institutions of
global economic governance, such as the IMF, the World Bank and its
affiliate, the Asian Development Bank. The fact that not only many
countries across the Asia-Pacific region, including traditional US al-
lies, such as Australia, New Zealand and South Korea, but also most
of the EU member states decided to join the AIIB demonstrates the
attraction that Chinese-led, multilateral institutions hold in the con-
text of regional and global economic governance. And it demonstrates
the importance that EU member states attach to being part of this
development, even at the risk of disagreement with their traditional
ally in North America.
416
Through these various mechanisms, the EU has developed a strong

presence in Asia. This presence is sometimes strengthened, but some-
times also resisted by EU member states that seek to promote their own
national agendas vis-à-vis individual countries in Asia—which reflects the
hybrid nature of the EU discussed earlier. In any case, the institutionali-
sation of inter-regional relations, as described here, does provide a strong
foundation for the EU on which to engage with the key players in the
Asian region across a range of issues, be it economic, security or societal.
However, the wide-ranging efforts with which the EU seeks to en-
gage Asian partners on multiple levels also have to confront a number
of challenges. This is not only due to the current problems facing the
EU itself, which were discussed earlier, but also because of a number
of underlying differences in the attitudes of actors on both sides. The
following section will briefly discuss such obstacles in EU-Asia relations,
which may stand in the way of closer cooperation.
The EU and Asia: Conflicting Interests and Contrasting Worldviews
Much as there is mutual interest in trade and investments linking Europe

and Asia together, there are also numerous differences and potential con-
flicts hampering closer cooperation. Even in terms of trade itself, the EU
and its Asian partners often do not see eye to eye. In Europe, there are
long-standing concerns about the (lack of) protection of intellectual proper-
ty rights in China and other Asian jurisdictions, as well as frequent disputes
about alleged dumping and the corresponding protectionist measures. The
2013 solar panel dispute between China and the EU is a case in point.
The wider problem here is that the past pattern of Asia exporting
low value-added goods to Europe, and Europe in turn exporting high-
tech and luxury goods to Asia, is increasingly under threat from the
development of higher value-added production chains in the emerging
economies of Asia. As it happens, the EU as a whole and the majority
of EU member states have a widening trade deficit with China. Follow-
ing the export-led success of Japan and, subsequently, of the so-called
“Four Asian Tigers”—the economies of Taiwan, South Korea, Singapore
and Hong Kong—,European manufacturers are now also confronted
with increasing competition by Chinese producers in their traditional
markets. Consequently, the symbiotic trade relationship of the past
may give way to greater competition—something which also limits the
417
desire of Europe to support the Chinese demand for market economy

status in the World Trade Organisation and the negotiation of a free-
trade agreement between the EU and China.
Arguably, however, what complicates relations between the EU and
Asia, more than conflicting material interests, are deeper-seated dif-
ferences about values and norms. Two prominent examples of such
differences are disputes about human rights and disagreements about
environmental standards. As mentioned earlier, the EU, as a matter
of standard practice, seeks to promote norms such as human rights
and the rule of law in its foreign policy. In relating to authoritarian
governments in Asia, this leads to frequent clashes and the insistence
from Asian partners not to intervene in their internal affairs. There is
an inherent tension between the promotion of what the EU regards as
universal values and what Asian governments often brand as Western
interference in their domestic affairs.
Diverging responses to the suppression of the democracy movement
and systematic violations of human rights in Myanmar/Burma after
the 1990 general election was illustrative of these different attitudes.
Whereas the EU (together with the United States and others) imposed
sanctions on the military regime, Burma’s partners in ASEAN contin-
ued to engage with the leadership—a policy which actually led to strains
in the otherwise good relations between the EU and ASEAN.
With regard to environmentalism, a key “battleground” has been
the international climate change negotiations, which have seen the
EU pitched against the emerging powers of Asia, in particular large
emitters such as China and India. While the EU has been pushing for
binding reductions in CO2 emissions, the large Asian countries have em-
phasised their development status and demographic situation, arguing
that they should not be forced to reduce their emissions as rapidly as
Europe (even if by the time of the 2015 Paris Climate Conference, China
appeared to have moved closer to the European position).
Even if disputes about human rights and climate change may also be
linked to different levels of economic development, they are above all
signs of deep-seated differences in the respective world views on each
side about key principles such as state sovereignty and the primacy of
international law. For the European Union, the idea that state sovereign-
ty can be pooled, shared or, indeed, be given up is a living reality. The
very meaning of European integration implies the interference by an
external authority in the internal affairs of the EU member states. Even
418
though national governments in Europe may not agree with the outcome
on every occasion and will frequently protest against “impositions” from
Brussels, EU member states have fundamentally accepted that binding
laws, having a direct effect on their citizens, governments and business-
es, are being made at a level above the nation-state. The idea that states
are subject to binding law is an everyday practice in the European Union
and, as such, is also promoted by the EU in its external relations.
WHAT COMPLICATES RELATIONS BETWEEN

THE EU AND ASIA ARE DIFFERENCES ABOUT HUMAN
RIGHTS AND ENVIRONMENTAL STANDARDS
The Asian experience is very different and, arguably, diametrically op-

posed to the European one. State sovereignty is regarded as non-negotia-
ble by Asian states, and the principle of non-intervention is derived from
this strong belief in the continuing relevance of sovereignty, creating
a very different foundation for international diplomacy. In the case of
regional cooperation through ASEAN, for example, it means that states
rely on decision-making by consensus, mutual respect among govern-
ments and informal agreements, rather the enforcement of binding law.
States in Asia are willing to cooperate extensively, but without giving
up any notion of remaining sovereign and in control of their own affairs.
These divergent attitudes towards state sovereignty and international
law lead to rather different views about multilateralism. Even though
European and Asian partners have entered into numerous institution-
alised forms of cooperation, as discussed in the previous section, they
hold rather different assumptions about the purpose of such institu-
tions. Whereas for the EU, multilateral institutions are seen as an ex-
pansion of rule-based international governance, Asian partners, such as
China, tend to view these in the context of their geo-strategic thinking,
as a form of “soft balancing” vis-à-vis the US.
Such differences complicate EU-Asia relations and may be the cause
of greater difficulties in the future, but they do not stand in the way of
closer cooperation in the current context. On certain issues, secular
trends help to offset disagreements in principle. China, for example,
has become more cooperative in global climate change negotiations as
a result of its own domestic fight against pollution, and the EU, in the
face of its internal crises, has become more modest in its efforts to pro-
mote its own norms and values. But even though principled differences
419
remain, these do not undermine a general sense that the EU and the
states of Asia have a lot to offer each other and can be partners in a
changing world.
Outlook: EU-Asia Relations in a Time of Change
This chapter has sought to discuss the opportunities and the challenges
for EU-Asia relations at a time when global politics are in a period of
flux. We have seen that the prospects of EU-Asia relations are subject to
developments on various levels: at the level of individual states, as these
make choices about their economic orientation and political alliances;
at the regional level, in particular on the European side, as the EU is in
the grips of multiple crises, creating a challenging time in which to pre-
serve normative principles and develop strategic relations with distant
partners in Asia; and at the global level, as both European and Asian
countries need to come to terms with the changing and unpredictable
nature of the emerging multipolar world. Developments on each of these
levels of policy-making have the potential to impact EU-Asia relations
in either a supportive or a detrimental manner.
THE GEOGRAPHICAL DISTANCE BETWEEN THE

EU AND ASIA CAN BE WHAT LIMITS THE CHANCES OF
CONFRONTATION AND ALLOWS TO MAINTAIN THE
PARTNERSHIP THAT HAS GROWN IN THE PAST
While this makes it difficult to make predictions about the future evo-
lution of EU-Asia relations, it appears safe to say that the underlying
conditions remain encouraging for the maintenance of good relations
in times to come and, indeed, favour the assumption that there will be
closer cooperation in the future. The institutionalisation of inter-region-
al cooperation is set to continue through further bilateral agreements
and multilateral arrangements, bringing the EU and its Asian partners
closer together. The mutual reliance of both Europe and Asia on trade
to facilitate their economic growth also means that both sides have a
strong interest in regional stability and effective global governance. Dif-
ferences are likely to remain on how best to achieve such stability, but on
balance, Europeans and Asians have every interest to look for negotiated
solutions and cooperative arrangements, rather than confrontation.
420
Yet, it also needs to be remembered that the EU and Asia do not relate
to one another in a vacuum; the nature of inter-regional cooperation
is subject also to influences from other actors at the global level. The
importance of the US as a traditional ally of Europe and as a divisive
power in Asia has already been mentioned. It remains to be seen how
US diplomacy will affect EU-Asia relations in the future, in particular
after the Presidency of Barack Obama, as none of his potential succes-
sors is likely to engage as much with Asia as his administration did. The
resurgence of Russia under Vladimir Putin adds further uncertainty
to this calculation. It provides a new rationale for deeper cooperation
between Russia and China, but it may also reinforce a shift of American
attention away from the Pacific and back to Europe.
Global politics are changing, creating a context that holds both chal-
lenges and opportunities for EU-Asia relations. The EU and Asia have
come much closer to one another over the past two decades, as their
economic interdependence has deepened, and their relations have be-
come increasingly institutionalised. Efforts are under way, from both
sides, to bridge the geographical distance and facilitate yet more trade,
investment and political cooperation. Yet, it may just as well be the ge-
ographical distance between the EU and Asia that limits the chances
of possible confrontation and allows actors on both sides to maintain
the partnership that has grown in the past. The EU and Asia have close
ties, made stronger by the distance that remains between them.
RELATED ARTICLES:
Russia and Europe

421
E UR O P E A N FO R E IGN P O LI CY AND I TS C H ALLEN GES IN THE CU R R EN T CON TEXT
JAVIER SOLANA is president The EU is more than an economic and mone-

of ESADE Center for Global
tary union, it is a political integration project.
Economy and Geopolitics. He is
a distinguished fellow at Brook- Unison is necessary to face the enormous
ings Institution, senior fellow at challenges posed by our globalized world
the Hertie School of Governance,
chairman of the Aspen Institute and the emergence of new actors. The
Spain, honorary president of the challenges faced at our borders make the
Centre for Human Dialogue and
advisor to the Institute of Mod- need for greater integration more evident.
ern International Relations of The world we live in, which is multipolar
Tsinghua. He is a member of the
board of the International Crisis and interdependent, faces global problems
Group, and the European Coun- and threats; solutions must be adopted
cil on Foreign Relations, among
others, and professor at the LSE. multilaterally. The ample experience of the
He has been Secretary General of EU building multilateral institutions and in
the Council of the EU, High Rep-
resentative for CFSP and Minis- collective dispute resolution is a great input
ter for Foreign Affairs in Spain. to global governance.
422
EUROPEAN FOREIGN
POLICY AND ITS CHALLENGES
IN THE CURRENT CONTEXT
The Complexity and Necessity of a European Foreign Policy
The European Union is still the world's first economic and trade pow-
er, despite the fact that European nations have been hard hit by the
recent recession while other countries have experienced rapid growth.
However, these years of economic crisis have made us concentrate our
efforts on the EU's internal problems, with the consequent loss of clout
in international affairs. We must return to the front line.
THE CFSP IS DIRECTLY RELATED TO HUMAN

RIGHTS, THE RULE OF LAW, INTERNATIONAL LAW,
AND EFFECTIVE MULTILATERALISM
The European Union's external actions convey its way of understand-

ing the world, freedom, personal rights, and its idea of justice. The com-
mon foreign and security policy (CFSP) is directly related to European
values: human rights, the rule of law, international law, and effective
multilateralism. However, the CFSP is also important at the internal
level, as it facilitates cooperation among member states and creates
more opportunities for inter-member consensus and compromise. The
EU, like all institutions, is defined by its actions.
European foreign policy cannot continue to be a mere declaration of
intent, a matter of secondary importance for which its member states
are unwilling to relinquish one iota of their sovereignty. We must decide
where we want to go, what role we want to play in international affairs,
and how to achieve those goals. But we also need to address something
even more basic: we must agree on a definition of our common interests
as a European Union.
When analysing European foreign policy from both the institutional
and operational perspectives, we have to consider the characteris-
tics of the present moment and the forecast for the future. Many of
423
today's security risks, such as cybercrime or transnational terrorism,

are global and cannot be dealt with fully or effectively from a position
of national sovereignty.
The scenario has changed substantially since the early days of the
European Union. Many countries that have emerged in recent years
already surpass the EU states in population, size, and economic growth.
All of them want to participate in global decision-making processes and
influence the course of world events. In this new context, European
countries have to understand that, in order to be an international actor,
the EU must act in unison and speak with one voice. If each member
state acts individually, Europe will find itself relegated to the role of
mere spectator in the arena of major world events, with neither the
capacity nor the power to influence their outcome.
IF EACH MEMBER STATE ACTS

INDIVIDUALLY, EUROPE WILL FIND ITSELF
RELEGATED TO THE ROLE OF MERE SPECTATOR
IN THE ARENA OF MAJOR WORLD EVENTS
Unfortunately, the task of materializing European foreign policy has

proved to be quite complicated. The EU member states have very dif-
ferent historical backgrounds, and consequently their understanding
of foreign policy varies widely. Geographical location is undoubtedly
a key factor in defining the interests and agenda of each country, as
are cultural and linguistic ties. Some European states are permanent
members of the United Nations Security Council, while others are more
interested in handling their border problems. Getting so many differ-
ent voices to sing the same tune is a task that requires a great deal of
finesse as well as a strong commitment from each member.
The channels and structures for developing European foreign policy
have evolved since the ratification of the Maastricht Treaty, and the
process is still underway. We have already made great strides, espe-
cially since the signing of the Treaty of Lisbon, which expanded the
mandate of the High Representative and the European Exterior Action
Service, charged with representing the EU abroad. Nevertheless, we
must continue working to achieve greater integration and a clearer
sense of direction.
424
Current Challenges in Foreign Policy
At this point in time, international issues largely dominate the European

political scene. Many of the world's most volatile and troubled regions
lie just across Europe’s borders, and this proximity increases our re-
sponsibility to design and implement solutions.
Challenges in the East
On the EU's eastern border, in Ukraine, a conflict broke out a little

over one year ago that has substantially complicated relations with
Russia, reviving dynamics we assumed had been extinguished at the
end of the Cold War. The EU has maintained relations with Ukraine
since it became an independent state in 1991. Later, in 2007, the EU
and Ukraine began negotiations on the Association Agreement, a free
trade treaty with a few political ramifications. However, ratification of
the agreement was postponed after the case of former Prime Minister
Yulia Tymoshenko led to a diplomatic dispute.
In 2013, when everything was finally ready for the agreement to be
signed at the Eastern Partnership Summit in Vilnius, President Yanu-
kovych refused to ratify the treaty. Instead, he accepted the Russian
counteroffer to buy eleven billion euros' worth of Ukrainian bonds and
substantially lower the price of gas exports to Ukraine. From that mo-
ment on, protests by citizens and the pro-European opposition against
the Yanukovych government and its alignment with Moscow grew more
frequent and intense. The diplomatic and economic crisis led to an
escalation of violence and tension between pro-Russian and pro-Euro-
pean factions, with notorious consequences in Crimea and the eastern
regions of Ukraine.
After the Crimean referendum and declaration of independence, in
March 2014 President Putin signed a treaty confirming the peninsula's
annexation to the Russian Federation and acknowledging that Crimea
had always been a part of Russia. A few months later, the provinces of
Donetsk and Luhansk proclaimed themselves independent republics, a
decision which, according to the Kremlin, had to be respected.
The Russian government's actions during these events amounted to a
violation of international law, to which the European Union and others
have responded with sanctions. We cannot overlook the fact that, since
1991, when Ukraine declared its independence from the Union of Soviet
425
Socialist Republics, Russia has acknowledged the country's territorial

integrity in several international treaties.
Firstly, Moscow's decision to challenge Ukrainian sovereignty over
the Crimean Peninsula and the eastern region of Donbas represented a
breach of the security order established by consensus in the Helsinki Final
Act of 1975. In this agreement, which planted the seed of the Organization
for Security and Cooperation in Europe (OSCE), the participating states
committed to respect the inviolability of frontiers, the territorial integrity
of states, and non-intervention in internal affairs, among other principles.
Furthermore, in the Budapest Memorandum (1994), the United States,
the United Kingdom, and Russia specifically agreed to respect the ter-
ritorial integrity of Ukraine, and in exchange Kiev gave up its nucle-
ar weapons. For its part, the European Union has always desired to
maintain good relations with Ukraine, though ideally without straining
EU-Russian relations or being forced to choose between Russia and
Ukraine as a trade, security, or other type of partner.
Russia's failure to honour the commitments made when it signed
these agreements must be analysed in the context of a specific junc-
ture in Moscow's history. For some time, the Kremlin has been overt in
its attempts to maintain very close ties to former Soviet bloc countries,
owing to a perception of the United States and the European Union
as its main competitors who are striving to draw the USSR's former
members closer to themselves. Since the second NATO expansion into
Eastern Europe, rapprochement between certain countries and the Eu-
ropean Union has been interpreted as a threat to Moscow's spheres of
influence, with the potential to lessen its influence in the international
arena. Russia has proved, as it already did in Georgia in 2008, that it is
prepared to use force and ignore its contractual obligations.
After nearly a year of fighting, in February 2015, Germany, France,
Ukraine, and Russia signed the Minsk II Agreement. From a military
standpoint, the agreement basically entails a ceasefire and the withdraw-
al of heavy weapons. Politically, it calls for a constitutional reform to give
the provinces of eastern Ukraine greater autonomy. At the end of the
process, the central government in Kiev will once again have full control
over the Ukrainian-Russian border, currently in the hands of the rebels.
For months, a ceasefire has been in effect in the conflict zone, albeit
with frequent accusations of truce violations on both sides. Although
it seems that Moscow, currently plagued by serious economic troubles,
has no intention of resuming military action, it is not yet clear whether
426
it is willing to negotiate. We will have to wait and see how events unfold
in the coming months, once the local elections in Ukraine have been
held. These are scheduled to take place across the country except in
the eastern territories controlled by pro-Russian separatists, who have
called their own independent elections in violation of the Minsk II terms.
Given the tremendous magnitude of the dispute with Russia, resolving
the situation needs to be a priority on the European agenda. It is wor-
rying that countries which are neighbours of both the EU and Russia
believe they must choose between strengthening ties with Europe and
being loyal to Moscow. The EU is set to review the sanctions regime
against Russia in January 2016, at which point the measures will almost
certainly be renewed unless Moscow's position changes substantially.
Challenges in the South
Europe is affected, to a large extent, by political instability in North Af-

rica and the Middle East given their geographical proximity. For many
years, the United States has had the self-appointed mission of ensuring
security in the Middle East, motivated by the need to protect its own
interests there, but America’s declining fuel dependency and the shift
in its foreign policy towards Asia has altered the nature of US involve-
ment in the region. Meanwhile, Europe's heavy reliance on fuel imports
and the security risks posed by instability make EU involvement an
inevitable necessity.
THE NUMBER OF PEOPLE SEEKING ASYLUM IN OTHER

COUNTRIES IS GROWING EXPONENTIALLY, SURPASSING
THE FIGURES RECORDED DURING WORLD WAR II
The spread of war and violence across the region is creating a major
humanitarian crisis. The number of people seeking asylum in other coun-
tries is growing exponentially, surpassing the figures recorded during
World War II. At present, there are more than four million refugees from
Syria alone, according to data supplied by the UN Refugee Agency. Al-
though the majority seek asylum in neighbouring countries and remain in
the region, every day many of them risk their lives to reach Europe. This
situation represents a major challenge for European nations. We must
be quick in our humanitarian response and honour our legal obligation
to give asylum to those fleeing from persecution. This dire emergency
427
should also spur us to step up our involvement in the search for solutions
to the conflicts that have forced so many to seek refuge in Europe.
Regional troubles have intensified particularly since 2011, in the wake
of the riots popularly known as the “Arab Spring”. Unfortunately, these
uprisings—a product of social tensions caused by the difficult economic
situation and the people's widespread frustration with the socio-politi-
cal scenario in their countries—have not had the hoped-for results and,
in some cases, have actually degenerated into terrible conflicts.
In Libya, the nation has been in a state of chaotic upheaval since
Gaddafi's death, with immediate consequences for other Mediterrane-
an countries. The growing division of the country, which culminated
in the creation of two governments and allowed Islamic State militias
to gain footholds in parts of eastern Libya (such as the city of Derna),
makes it even harder to maintain security as the country is assailed
by myriad internal and external challenges. In addition to terrorism,
the repercussions of the Libyan conflict for migratory pressure and
the possibility that it may spread to the rest of this already debilitated
region pose real threats to Europe. In fact, some are already saying that
Libya is poised to become the “Mediterranean's Somalia”.
THE RISE OF THE ISLAMIC STATE

AND AL-QAEDA FACTIONS HAVE MADE
THE SITUATION EVEN MORE DRAMATIC
FOR SYRIAN CIVILIANS
In the early days after the overthrow of Hosni Mubarak, in 2011, it

looked like Egypt was on the verge of a transition to democracy. In the
2012 presidential elections the Muslim Brotherhood, led by Mohamed
Morsi, was voted into power, albeit with a very slim majority and a
highly polarized electorate. With Morsi as president, the country had to
face the serious economic troubles that had plagued it for years and the
new administration's attempts to incorporate the precepts of Islamic
law into the Egyptian legal system. Ultimately, however, the greatest
trigger of social unrest was the attempt to legislate an expansion of
the government's executive powers. On 3 July 2013, after days of mass
demonstrations demanding Morsi's resignation, the Egyptian army
staged a coup and the head of the Armed Forces, Abdel Fattah el-Sisi,
became president. Since then, although violence has diminished, the
country has been governed by a military dictatorship.
428
A group of Egyptian demonstrators in Cairo express

their support to the Syrian Revolution.
In Yemen, the instability ushered in by the January 2011 protests was

compounded in early 2015 by the uprising of the Houthis, an insurgent
Shiite group, which managed to seize control of the nation's capital. This
clash has once again evidenced the rift between Shiite and Sunni Mus-
lims, a determining factor of many other conflicts in the region, and the
role of Iran and Saudi Arabia as the respective leaders of these factions.
There are several causes underlying the dynamics of confrontation
in the region, but one is fundamental for understanding the current
situation: the antagonism between Sunni and Shiite Muslims. The di-
vision between these branches of Islam is, of course, religious, but it
also has strong geopolitical implications: Iran, with a Shiite majority,
and Saudi Arabia, where the majority are Sunni Muslims, have been
vying for supremacy in the region for years. This tension is at the root
of many ongoing conflicts.
In Syria, the civil war still raging between the regime of Bashar al-As-
sad and rebel forces has already caused more than 200,000 deaths and
the forcible displacement of over twelve million people (both within
Syria and to other countries). This means that, of the total Syrian pop-
ulation at the start of the conflict, over half has been displaced. Many of
the people forced to flee from their homes by the threat of persecution
and lack of protection take refuge in neighbouring countries such as
Turkey, Lebanon, or Jordan, which are suffering the consequences of
429
a massive refugee influx—a phenomenon we are also seeing now on

Europe's borders. The radicalization of the rebels opposed to Al-Assad,
the involvement of so many foreign powers in the conflict in one way
or another, and the terrifying rise of extremist terrorism all represent
enormous obstacles on the road to peace.
Al-Assad's regime has been backed by Russia and Iran from the outset,
while the Sunni opposition has garnered the support of Saudi Arabia,
Turkey, and Qatar. Meanwhile, the rest of the international communi-
ty has been hesitant and reluctant to get involved, influenced by the
memory of past experiences in Afghanistan and Iran. Since the chem-
ical weapons disarmament deal between the United States and Russia,
there have been several attempts to open a new dialogue, though none
have prospered. In the interim, the Syrian opposition has splintered and
the more radical factions have gained considerable ground. The rise of
terrorist groups, namely the Islamic State and al-Qaeda factions, have
made the situation even more dramatic for civilians and significantly
complicated the task of designing a solution to the conflict, a solution
that would also be critical for resolving many other regional conflicts.
Today there is only one bastion of hope in the region, though even
there it is increasingly tenuous: Tunisia, where a successful political
transition was carried out after deposing the dictator Ben Ali, and today
the country is a democracy. However, the situation is fragile and the
threat of terrorism is also present, as confirmed by the tragic events
that took place several months ago.
The intensity of civil conflicts is exacerbated by another highly desta-
bilizing element with disastrous consequences: fundamentalist terror-
ism, with the main concern today being the terrorist group that calls
itself the Islamic State, also known as ISIS. Although this organization
was established in Iraq in 2003 and played an important role in the
Iraq War during the early years of its existence, the Syrian civil war
was where it grew and flourished. In 2014 the group severed its ties
to Al-Qaeda and is steadily gaining ground in Syria and Iraq, where it
already controls a significant part of the territory.
Despite being a local organization, ISIS has global ambitions whose
scope has already been made apparent to us. To date, it has recruited
over 25,000 members from more than one hundred different countries,
vastly increasing the organization's field of action and dangerousness.
These statistics also suggest that the roots of fundamentalism are not
limited to the region where this and other like-minded terrorist groups
430
were spawned, for there are numerous individuals in many other parts
of the world who seem to share their intentions.
Global Challenges
In addition to the risks posed to Europe by conflicts and disputes along

its borders, we must consider other challenges of a global nature. As
stated earlier, today we live in a global world where borders are in-
creasingly permeable, and many of the security threats we now face
are global as well. Security issues such as the proliferation of nuclear
weapons, organized crime, arms and human trafficking, inequality, and
pandemics affect us all.
CYBERATTACKS ARE ON THE RISE

AND CLIMATE CHANGE THREATENS TO
DESTROY OUR ENVIRONMENT
Cyber risks are one of the most obvious global threats today. Infor-
mation and communication technologies have become a fundamental
part of daily life for the majority of the world's population, as well as
a cornerstone of innovation and economic growth. These technologies
have enormous benefits, but they also entail substantial risks, as the
information they contain or convey can be accessed and used for crim-
inal purposes. The number, magnitude, and impact of cyberattacks are
on the rise, and so is the level of concern about the high vulnerability of
the internet, a tool on which practically every economic activity relies
in this day and age. The internet was designed as an essentially open
platform, because its creators did not anticipate that it would be used
to offer a wide range of critical services requiring tighter security.
The difficulty with cyberattacks is that they take place in a setting—
cyberspace—characterized by its broad accessibility, which by defini-
tion makes it less secure. Moreover, cyberattacks can be perpetrated
with total anonymity. The difficulty of tracing attacks and the fast pace
of technological change makes it very hard to come up with a response
capable of dissuading hackers. IT security mechanisms cannot be de-
signed for just one jurisdiction, because there are no political borders
in cyberspace. The only effective path is multilateral action.
The same is true of climate change, which threatens to destroy our en-
vironment and means of subsistence, especially for future generations.
431
Even though scientists have been studying the phenomenon of climate

change since 1988, and despite the fact that 195 states agreed to prevent
dangerous climate changes by joining the United Nations Framework
Convention on Climate Change (UNFCCC) in 1992, diplomatic progress
in this area has been very slow.
The European Union is responsible for a significant part of past and
current CO2 emissions, and must therefore play a leading role in the
efforts to mitigate climate change and help other countries, especially
developing nations, to do the same. The UNFCCC Conference in Paris
has been held in December. This has been the most important summit of
recent years, and it is imperative that all participating countries reach a
consensus and set ambitious goals for the future. In this respect, Euro-
pean states have a duty to take the lead, set a good example, show strong
political will (especially with regard to climate finance), and use their dip-
lomatic experience and power to facilitate an effective agreement in Paris.
New Balances of Power on the World Stage
Europe ceased to be the centre of the modern world long ago. Other
countries have now come to the fore, propelled by strong economic
growth, and are claiming their rightful place in the international polit-
ical arena. European countries should draw two important conclusions
from this new scenario.
Firstly, we need to focus our attention on the evolution of emerg-
ing powers like China, India, and Brazil. We must make it an urgent
priority to study and thoroughly comprehend their reality, the track
record of their growth, their values, histories, and interests, because
the balance of world power is shifting towards them, forcing us to
alter our perspective. It is vital that the European Union revise its
strategic interests and the framework of its relations with China and
other Asian countries.
The Asia-Pacific region has recently acquired great strategic impor-
tance in international relations. We have already witnessed the reori-
entation of US interests in Asia, negotiating and signing the TPPA and
establishing trade ties with these countries.
The region is marked by numerous territorial and border disputes,
nationalist movements, and a considerable level of distrust among coun-
tries. When analysing this part of the world, security issues are often
overshadowed by its spectacular economic growth. However, there are
432
enough elements in place for important security challenges to emerge,

and the EU should monitor them closely.
One potential risk is located in the South China Sea. Many of the world's
nations are linked by the maritime trade that passes through this sea,
which bathes the shores of seven countries: China, Indonesia, Malaysia,
Vietnam, the Philippines, Brunei, and Taiwan. All of them have claimed
sovereignty over these waters on more than one occasion. Some offer his-
torical justifications, while others base their claims on the United Nations
Convention on the Law of the Sea. The South China Sea is a vital inter-
section of maritime traffic for all seven countries. In particular, the Strait
of Malacca is the shortest route between Asian oil consumers and their
suppliers in Africa and the Persian Gulf. In 2013, 27% of all oil carried by
sea and over half of all liquefied natural gas passed through this channel.
Moreover, this sea has an abundance of rich fishing grounds and esti-
mated reserves of eleven billion barrels of oil and 190 trillion cubic feet
of natural gas. Thus far, disputes over the waters of this sea have been
fairly low-key. However, China's growing economic and military power
in the region could break the status quo and lead to full-blown conflict.
Tensions between these countries mark the South China Sea as a
new centre of interest for global security and, more generally, for in-
ternational relations. Although this region may seem far removed from
Europe and its interests, problems here could have devastating conse-
quences for the global economy.
The second conclusion is that, given the influence they have acquired
of late, the emerging economies must be included in global governance
structures. Recently we have seen how China is taking steps to create
global governance organizations. China's large foreign exchange re-
serves have made it the world's biggest provider of finance to develop-
ing countries, and the China Development Bank now grants more loans
than the World Bank. Additionally, in October 2014 China created the
Asian Infrastructure Investment Bank (AIIB), which has already been
joined by several European countries, including France, Germany, Italy,
Spain, and the United Kingdom.
The AIIB has created a forty-billion-dollar fund to develop the “New
Silk Road”, which will affect Europe directly. This project includes an
overland economic belt that will begin in Xi'an and run westward to
Venice, passing through Central Asia, Turkey, Russia, and Germany.
It will also incorporate a maritime route stretching from China's east
coast to Venice, with stops at Singapore, Calcutta, Colombo, Mombasa,
433
Athens, and other ports. The two routes will form a network linking
Asia and Europe. The project's investments will affect approximately
60 countries, and one of the principal ports of call will be that of Pirae-
us, in Greece. This plan to improve connectivity, which will consolidate
China as the EU's number-one trade partner, confirms the Chinese
government's determination to prioritize Euro-Asian relations.
In this new scenario, it is crucial that the EU continue to strengthen in
ternational and trade ties with the Asian continent. An example of success
in this area is the free trade agreement signed with Vietnam in August
2015. However, although Asia is often analysed primarily from an economic
standpoint, there are other aspects of Euro-Asian relations worth noting.
WE NEED TO FOCUS OUR ATTENTION

ON THE EVOLUTION OF EMERGING POWERS
LIKE CHINA, INDIA, AND BRAZIL
For example, in an Asian continent that has achieved economic but

not political integration, the EU can offer the benefit of its extensive
experience in regional integration, something that would contribute
decisively to promoting long-term stability in the region.
While acknowledging the limitations and shortcomings of the Euro-
pean project, a greater degree of EU involvement in Asia's existing re-
gional integration structures—such as ASEAN or the ASEAN Regional
Forum, the only security dialogue forum in the Asia-Pacific in which
the EU has its own seat—would be highly beneficial.
The Road Ahead
The EU must offer an appropriate response to the magnitude of the

challenges it faces and what is expected of it in the world. Knowing this,
the EU's High Representative for Foreign Affairs, Federica Mogherini,
has been mandated to prepare a new global strategy on foreign policy,
with the perspective and focus needed to promote EU external action
and increase its effectiveness. Approval of this policy, slated for June
2016, will be a major step forward for the EU and hopefully will address
the most pressing needs in this area.
434
The EU's Diplomatic Work
One of the ways in which the EU can implement its foreign policy quite
successfully is through diplomacy. The EU is regarded by many as an
experienced mediator in settling numerous conflicts, and it is precisely
in the role of negotiator that it manages to achieve many of its goals.
The nuclear deal with Iran, signed this past July, is a good example
of what the EU can accomplish thanks to its diplomatic skills. It was
the EU who initiated negotiations with Iran in 2003, and at the time we
Europeans were the only ones involved in the talks. Later on, the EU
joined forces with the permanent members of the UN Security Council
and Germany to form a group called the E3/EU+3. The agreement re-
cently signed with Iran regarding its nuclear programme has opened a
window of opportunity for bringing greater stability to the Middle East.
Teheran's ties with the Iraqi government, the Al-Assad regime in Syria,
the Houthis in Yemen, and Hezbollah in Lebanon make it a key player
in regional politics.
As for our relations with Russia, it is very important that we attempt
to strengthen ties and recover the mutual trust that has been lack-
ing since the beginning of the Ukraine dispute. However, the EU must
firmly insist on the observance of international law; this has to be our
red line. The harmonious coexistence of Europe and Russia in the Eu-
ro-Asia region is undoubtedly a very positive thing for both countries.
However, it will undeniably take some time for the tensions created by
this conflict to die down so that we can rebuild a climate of mutual trust.
Another of the EU's objectives must be to promote stability and de-
mocracy in the countries of Eastern Europe and the Balkans. It would
be advisable for the EU to pay special attention to voices outside gov-
ernment channels, in order to gain a better understanding of each so-
ciety’s needs. Civil society demands, with growing insistence, better
governance and more respect for civil rights.
In the Middle East, the EU cannot be expected to solve the conflicts,
but it can use diplomacy to become a key facilitator in orchestrating
regional agreements. Bringing Sunni and Shiite Muslims together is
the key to peace in the Middle East, and promoting this should be the
goal of all other actors with an interest in ensuring the region's stability.
Peace cannot be achieved with a solution imposed by outsiders; this
would only plant the seed of a new and perhaps even deadlier conflict
in an area whose population has already been devastated by too many
435
Members of the Eurocorps service hold the

European flag in front of the Parliament.
years of war. It is therefore essential that the EU maintains a constant

dialogue with regional powers like Iran and Turkey.
The European Union has another major task ahead of it: contributing
to the improvement of governance in countries where state institutions
do not operate efficiently. Helping to build more capable and effective
government bodies is the best way to wrest power away from terrorist
groups and organized crime and place it back in the hands of the state,
where it belongs. In fact, in the countries of the Sahel this seems to be
the only viable way of achieving the stability that is so necessary for
their inhabitants and security.
European Neighbourhood Policy
One of the instruments through which the EU develops its foreign re-
lations is the European Neighbourhood Policy (ENP). Designed to ar-
ticulate relations with our closest neighbours, this policy currently has
two subdivisions: one for the countries of Eastern Europe, and one for
the southern states. The EU does, in fact, have one sphere of action that
takes precedence above all others—namely, its borders—and relations
with neighbouring countries must therefore be handled with special care.
However, grouping many different countries together under the
concept of southern or eastern neighbourhood has proved inefficient
because each neighbouring state evolves at a different pace. Tunisia's
436
current situation is not comparable to Egypt's. And other countries,

such as Turkey, though not really neighbours in a technical sense, are
key pieces for addressing many current problems. It is a mistake to
believe that we can apply a single policy, almost automatically, to very
different countries. Having a separate policy for each nation may be
more complicated, but it is far more efficient.
As the preparatory reports on the new European foreign policy ac-
curately point out, EU external action needs to be more flexible to in-
crease the effectiveness of all its measures. Adopting an approach to
other countries that is more political, via diplomatic channels, and less
bureaucratic and regimented is a more effective way of increasing the
EU's commitment to improving living conditions, democratization, and
economic and social progress.
Security
The European Union has a responsibility to create the necessary condi-

tions (political, social, etc.) for averting war. We cannot hope to combat
the many threats to European and global security unless we work to
perfect a common security policy.
In terms of military might, the individual relevance of European
countries is waning, and conflicts on our borders underscore the need
to be prepared for any contingency. Over the past several years, the
economic recession in Europe has caused governments to be less con-
cerned with international security issues and apply budget cuts in the
area of defence.
Yet during those same years, as mentioned above, the problems facing
Europe have multiplied, and they are too great for any one country to
solve on its own. In fact, in this global, multi-polar world, no nation can
guarantee its own safety without assistance. The distinction between in-
ternal and external security is also increasingly blurred, with two obvious
implications: security and defence policy must now be perfectly aligned
with foreign policy; and security risks should be viewed as something
common to all member states, for even those with conflict-free borders
have to consider the impact of security threats on their territory.
The EU's security and defence policy is one of the most difficult tools
to implement in the context of the European project. In matters of
defence, differences between the domestic interests of member states
have been even more pronounced than in foreign policy. The countries
of Central and Eastern Europe are more concerned about the insecu-
437
rity that Russian policies might create, while southern members tend
to prioritize the risks derived from conflicts in the Middle East and the
challenge of mass migration in the Mediterranean.
The European Security Strategy, the framework that includes the
common security and defence policy (CSDP), was approved in 2003.
The world has changed substantially since then, and European strategy
must take into account the current scenario. In December 2013, the Eu-
ropean Council, aware of the need to reconsider European security and
defence strategies in light of new threats, placed the CSDP at the centre
of the debate. Since then, several security policies have been adopted on
specific issues to serve as a guideline for the actions of member states.
However, now that the security strategy is being revised, we must
take the opportunity to move decisively towards greater integration.
The effectiveness of the EU's security strategy, which must go hand-in-
hand with its foreign policy strategy, depends on the cooperation and
real commitment of its member states.
Defence budgets need to be increased, but above all they need to be
used more wisely, minimizing inefficiency. Better coordination among
members will increase our global presence and capabilities, not by
spending more but by optimizing resources. We must push for integra-
tion on security matters at the European level, with a strong emphasis
on R&D+i, while reinforcing the role of the European Defence Agency.
Another fundamental task is to ensure that the defence industry market
works properly, making it more open and transparent to promote the
beneficial exchange of technology and greater synergy between the
civilian and military sectors.
Additionally, the EU needs to take the lead in designing global cyberse-
curity strategies. Over the last several years, many international, regional,
and technical institutions have addressed the issue of security in cyber-
space, including the United Nations, the Council of Europe, the G20, the
G8, and the Organization for Security and Cooperation in Europe (OSCE).
However, there is no consensus on what the guiding principles of global
cyber security governance should be. The EU must actively participate
in the process of drafting a basic regulatory framework, similar to that
which the international community has adopted on matters of global
health or weapons proliferation. We need to contribute to the debate and
shape the agreements that are eventually reached; we cannot afford to
fall behind in the area where all of the world's economic activities are
concentrated today. Let us not forget that, by the year 2020, two-thirds
of the global population will be connected to the internet.
438
Conclusion: Our Role on the International Stage
A political union like the EU cannot allow its member states to face the
challenges on their respective borders alone. In order to forge a foreign
policy that is truly common to all members, we must work together to
identify the risks we face and combine our individual perspectives to envi-
sion possible solutions and the EU's potential role in implementing them.
The best contribution that the EU can make to world peace is to stay
united and prevent new conflicts in Europe. However, it cannot stop
there. The EU, like every other global actor, has a great responsibility
to act in the face of current problems and conflicts, and there are many
important ways in which it can contribute to the design of conflict res-
olution mechanisms and multilateral institutions.
It goes without saying that the countries which make up the Europe-
an Union have made great efforts to reconcile their diverse individual
identities and seek common interests, and that experience can be very
helpful in many present-day scenarios. They have also created institu-
tions and mechanisms for integration which, though imperfect, have
proved to be successful.
The multi-polar world we live in needs multilateral institutions to
address global threats—threats that can never be neutralized if each
nation acts independently. Today's problems will be solved, not by con-
frontation and brute force, but through dialogue and consensus. The
EU's past experience in this area is an invaluable resource.
Moreover, exterior action is a necessary tool that allows the EU to
defend European interests. We cannot remain on the sidelines as mere
spectators in such a rapidly changing world; we must act, because those
changes also affect us. If we can agree on what the EU's stance should
be towards the rest of the world, our responses will be swifter and work
towards achieving a common goal.
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450
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OTH E R BBVA O P E NM I ND B OOKS
REINVENTING THE COMPANY CHANGE: 19 KEY ESSAYS

IN THE DIGITAL AGE ON HOW THE INTERNET
2015 IS CHANGING OUR LIVES
2014
The digital era has unleashed a far
reaching tsunami that many are As a tool available to a reasonably
still trying to understand and come wide public, the Internet is only
to terms with. Almost on a daily twenty years old, but it is already
basis the rules of the game for doing the fundamental catalyst of the
business are changing and we have broadest based and fastest techno-
to struggle to keep up with the fast logical revolution in history. It is the
moving, constantly changing land- broadest based because over the
scape. This has had a colossal im- past two decades its effects have
pact in the workplace, and nowhere touched upon practically every citi-
more so than in the so called tradi- zen in the world. And it is the fastest
tional sectors: to succeed in this new because its mass adoption is swifter
era, big organizations that up to now than that of any earlier technology.
have been profitable and leading It is impossible today to imagine the
examples in their areas of business world without the Internet: it ena-
for decades are confronted with the bles us to do things which only a few
need for swift, radical change. years ago would be unthinkable.
THERE’S A FUTURE: VISIONS VALUES AND ETHICS

FOR A BETTER WORLD FOR THE 21ST CENTURY
2013 2012
This book seeks to integrate the The main topic of this book is
various elements in the dissemi- ethics and values. That is because
nation of knowledge:How do they shared values and ethics are neces-
interact with each other? Where sary, and vital for the proper func-
are they leading us? And, more tioning of the economic, political
importantly, what can be done to and social network and, therefore,
ensure that this path, with all its for the well-being and development
acknowledged risks, leads us to of the potential of every world cit-
improve people’s quality of life in a izen. The intention of this book is
sustainable way? The future seems to discuss how we can understand
to be hurtling towards us at full tilt. and avail ourselves of universal eth-
For this very reason, if predicting ical principles in order to meet the
the future is particularly difficult great challenges that the 21st cen-
today, preparing for it is also vital tury has placed before us.
and urgent.
OTH E R BBVA O P EN MIN D B OOKS
INNOVATION. PERSPECTIVES THE MULTIPLE FACES

FOR THE 21ST CENTURY OF GLOBALIZATION
2011 2010
The decisive importance of inno- The book presents a panorama of

vation is the most powerful tool for globalization, a very complex and
stimulating economic growth and controversial phenomenon that is
improving human standards of liv- characteristic of present-day soci-
ing in the long term. This has been ety and decisively influential in the
the case throughout history, but in daily lives of all the world’s citizens
these modern times, when science at the beginning of the 21st cen-
and technology are advancing at a tury. Thus, the finest researchers
mind-boggling speed, the possibili- and creators worldwide have been
ties for innovation are truly infinite. sought out so that, with the great-
Moreover, the great challenges est rigor and objectivity, and in a
facing the human race today—ine- language and approach accessible
quality and poverty, education and to non-specialists, they can explain
health care, climate change and the and inform us of the advances in
environment—have made innova- knowledge and the subject of the
tion more necessary than ever. debates that are permanently ac-
tive on the frontiers of science.
FRONTIERS These books are available for

OF KNOWLEDGE reading on the OpenMind website:
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THE SEARCH

20 Francisco 100 Indermit 202 Christopher 288 Robin

THE UNRESOLVED LIMITS OF BIBLIOGRAPHY

342 John Peet 402 Thomas

THE FUNDAMENTAL IDEA THAT FUELS

different alternatives in the area of economic policy and institutional re-

EUROPE, BETWEEN STAGNATION

Today, European banking institutions face tremendous uncertainty in

THE RADICAL TRANSFORMATION OF THE BANKING

The second factor of uncertainty is the drastic and as yet unfinished

The Global Economy in Uncharted Territory

Global economic trends in recent years, especially those of developed

In this controversy, one end of the spectrum of opinion could be rep-

SECULAR STAGNATION DEFINES A SITUATION

The Impact of Technological Change on Growth

When attempting to assess the impact of technology, our greatest diffi-

InMoov animatronic android robot, made from 3-D printed parts.

All of this leads to widely acknowledged problems with the measure-

on investments in hotels and transport. Everywhere we turn, we find

future of employment: firstly, because demographic changes promise a

Europe’s Diminishing Global Clout

The preoccupation with secular stagnation—or, more generally, the pos-

However, the trend in emerging countries has been quite different. In

THE WORLD’S ECONOMIC CENTRE OF

Consequently, the world’s economic centre of gravity, formerly located

The Economic Policy Debate

i­ntensifying them temporarily in some areas, like Europe—and to adjust

Europe: A Critical Case?

The retirement age reform has triggered resilience

2015. The stated objective of this plan is to achieve a true monetary

­ uropean countries by around 11% in ten years (compared to a gain of

The Imminent Revolution of the Banking Industry

As it heads into that integration process, the European banking industry

­ onetary policy transmission and increases the cost of capital, under-

OVER THE PAST FIFTEEN YEARS, NEITHER

Of course, another mechanism for increasing income and margins is

THERE IS A NEW GENERATION OF CONSUMERS WHO HAVE

shook people’s trust in them. Most importantly, today there is a new

A group of PayPal workers in front of the

The Transformational Experience of BBVA

This is what we at BBVA understand by the term “digital transforma-

us an advantage over the vast majority of other banks, because most of

to some of them (Dwolla, for one); we have partnered with others on

The Future of the Financial Industry:

Regulation is a crucial issue that will determine, in one way or another,

Two different types of agents are operating in the financial industry

Europe’s Growth Model in Crisis

Transforming an analog company

Knowledge bankins for a connected society

THE EURO CRISIS AND THE FUTURE

From a long-term historical perspective, the European Union is one of

THE EUROPEAN UNION IS

Meanwhile, the European Union’s record as a guarantor of peace and

The Evolution of the European Union

EACH NEW STEP TOWARD

Conceptions of national interest are circumscribed by economic and

Therefore, European integration has often been served by a certain

unnoticed. Suddenly, they acquired much higher political visibility, and

The Origins of the Euro Crisis

Bundesbank held in the prior European monetary system. Chancellor

THE ECB WAS CHARGED WITH

investors bailed out of Greek bonds, contagion spread to Ireland, Portugal,

MANY OF THE PROBLEMS FACING

intensifying them temporarily in some areas, like Europe—and to adjust

uropean countries by around 11% in ten years (compared to a gain of

onetary policy transmission and increases the cost of capital, under-

8 A . Boltho and W. Carlin, “The Problems of European Monetary Union: Asymmetric

12 C . M. Reinhard and K. F. Rogoff, This Time is Different (Princeton: Princeton Univer-

14 W . Carlin and D. Soskice, “German Economic Performance: Disentangling the Role of

1 These statements are catalogued on the ECB website at https://www.ecb.europa.eu/